Rule of 72
Would you like to invest your money? Get in touch with an expert:
What is the Rule of 72?
Rule of 72 - Formula
Years to Double = ( 72 / Interest Rate)
where: interest rate = annual expected rate of return
The Rule of 72 can be applied in many fields. As a general rule, the rule can be applied to any situation that has a continuous growth. Examples are the population, fees or credit. The economy is expected to double within 36 years if the gross domestic product (GDP) grows by 2% annually (72/2=36).
The Rule of 72 can be used to demonstrate the long-term impact of fees on investment gains. Investment capital will be cut in half in about 36 years if a mutual fund charges 2% in annual fees. In about seven years, a borrower who pays 10% interest on his credit card (or any other form of credit that charges compound interest) will have doubled the amount he owes.
By applying this rule, one can determine how long it will take for the value of money to be halved due to inflation. Purchasing money today will be worth only half in 24 years if inflation is 3% (72 / 3 = 24). An investment will lose half its value in 12 years rather than 24 years if inflation increases from 3% to 6%.
Further, the rule of 72 can be applied to all maturities, provided that the returns are accrued annually. A compound interest rate of 6% per quarter (although interest accrues only annually) requires (72 / 6) = twelve quarters, or three years, in order to double the principal. It will take 144 months or 12 years for a nation's population to double if it grows at the rate of 0.5% per month.
What can we learn from the Rule of 72?
To double your wealth, it is imperative to understand the effects of compound interest when investing. In order to succeed in investing, both the cost of the investment and the inflation, as well as the overall return, are important factors. It is advisable to consult with a financial advisor or an independent wealth manager in order to obtain accurate information.
Would you like to invest your money?
Speak to an expert.
Your first appointment is free of charge.
