Have you ever heard of the Rule of 72? What is the Rule of 72 and why do investors need to know it?
The Rule of 72 is actually a very simple way of determining how long (number of years) it will take to double your investment. There are also variations like the rule of 70 and the rule of 69.3 but since the rule of 72 is the easiest to remember that is what we will concentrate on.
First keep in mind that this method is a shortcut method because to get 100% accuracy requires more complicated mathematics. The accuracy of this method is very close though so it will serve the average investor very well.
To determine the number of years it will take your investment to double you simply divided 72 by the actual number of the interest rate yield ( not as a percentage) and the resulting number is the approximate number of years it will take to double. It is most accurate when using rates between 6 % and 10% but will still come relatively close for other yields.
An example is:
My investment has an average yield of 7% – how long (number of years) will it take to double ?
72 / 7 = 10.28 years
or for 6% = 72/6 = 12 years
or for 8% = 72/8 = 9 Years
or for 10% = 72/10 = 7.2 years
Very simple and straight forward. So now you know what the Rule of 72 is !