How Understanding the Rule of 72 Works Can Build You Wealth

rule of 72

The rule of 72 can help you analyze an investment

Understanding the rule of 72 can help you figure out if an investment is worth putting your money in. It can also help you build wealth by comparing various investments. What is the rule of 72? Simply, it is a formula that will tell you how long it will take to double your money at a given interest rate. Here are a few examples.

How Many Years to Double Your Investment?

The rule of 72 is a quick way to find out how long it will take for a given investment to double. You can easily calculate this time-period if you know the annual interest rate of an investment. Simply take 72 and divide it by the interest rate. The answer will be the number of years for that investment to double.

So, if you are looking at an investment with a 4% interest rate you take 72 and divide it by 4. The answer is 18. That particular investment would take 18 years to double in value at a 4% rate of return. You can plug in any number that you want, but anything above around 15% starts to give unreliable answers.

Interest Rate Needed to Double an Investment

The rule of 2 can be used in reverse as well. If you want to know the interest rate that you would need in a given time frame, then you would set up the rule of 72 formula as follows.

Let’s say that you would like to double your investment in 8 years. We take 72 and divide it by 8. Our answer is 9. So, we would need to find an investment that yields 9% in order to double our money in our 8-year timeframe.

Calculators

There are various calculators online based on the rule of 72 that you can plug in numbers. You can try this one.

Conclusion

Understanding the rule of 72 can help you compare and choose investments if you know a few basic details. Be careful to not plug in large interest rates, or you will get incorrect results. Also, the rule of 72 is a good starting point to analyze an investment, but it should not replace an in-depth analysis before you invest your hard-earned money.

Read Also:

Time to Double Your Money

Investing for Beginners | Newbie Mistakes to Watch Out For

Things to Look For When Investing in Small Cap Stocks

Overcoming Common Fears of Investing

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