In this article, you will find an explanation of how to use the Rule of 72 to estimate investment returns and determine how long it takes to double your money. The article contains internal subheadings with a brief description of each.
How the Rule of 72 Works
The Rule of 72 is a simple way to estimate the time it takes for your investment to double in value, assuming profits are reinvested. It is a useful method to understand the time value of money and plan your retirement and investment strategies.
How to Use the Rule of 72
Divide the number 72 by the interest rate. The result is the number of years it will take for your money to double at that interest rate.
For example, if you can earn a return rate of 6%, how long will it take for $1000 to double to $2000? Here’s the equation: 72 / 6 = 12 years
Rule of 72 by Interest Rate
Interest rates vary, so the Rule of 72 can give different results based on what you are investing in. Here are some common interest rates along with the time it takes to double investment with each rate:
- 1% interest rate – 72 years
- 2% interest rate – 36 years
- 3% interest rate – 24 years
- 4% interest rate – 18 years
- 5% interest rate – 14 years
- 6% interest rate – 12 years
- 7% interest rate – 10.3 years
- 8% interest rate – 9 years
- 9% interest rate – 8 years
- 10% interest rate – 7.2 years
- 11% interest rate – 6.5 years
- 12% interest rate – 6 years
It’s Just an Estimate
Remember that this is just a quick estimate. The actual time it takes to double your money will vary based on changes in the rate of return over time, what you invest in, how you invest it, how interest is applied, and potential tax implications.
The Rule of 72 can also be helpful if you want to compare the growth rates of two investments. You can quickly see which one is likely to provide a better return rate so you can determine how to allocate your money.
The Rule of 72 can also be useful for estimating the impact of inflation. The average long-term inflation rate ranges from 3% to 4%. You will notice that something worth $100 today will cost $200 in about 20 years when using this rule.
Inflation can significantly affect your retirement goals. The Rule of 72 is useful for achieving and maintaining a long-term rate of return.
Source: https://www.thebalancemoney.com/using-the-rule-of-72-to-estimate-investment-returns-1289792
Leave a Reply