The Rule of 72 is a widely-used financial concept that allows investors to estimate how long it will take for an investment to double in value, given a fixed annual rate of return. This simple yet powerful formula can help investors make informed decisions and better understand the power of compound interest. So here’s an easy way to calculate how long an investment will take to double in value using the rule of 72.
The Rule of 72 is a straightforward mathematical formula used to approximate the number of years required for an investment to double in value. The formula is as follows:
Years to Double = 72 / Annual Rate of Return
The annual rate of return is expressed as a percentage. For example, if an investment has an annual rate of return of 6%, it will take approximately 12 years (72 / 6 = 12) for the investment to double in value. This rule is based on the concept of compound interest, which assumes that interest earned on an investment is reinvested, leading to exponential growth over time.
While the Rule of 72 is a valuable financial tool, it is essential to recognize its limitations:
Despite its limitations, the Rule of 72 remains valuable for investors. To use the rule effectively, consider the following tips:
So, let’s say you have $10,000 in your Savings Account and it pays you 10% return after tax per year (spoiler: they don’t… not by a long shot). How long would it take for your $10,000 to double based on interest alone?
Well, if you withdraw the interest every year, at 10% return, it will take 10 years (obviously). But through the magic of compound interest, it will take a lot less time. How much less? Well, about 2.8 years meaning it takes about 7.2 years to double.
And it turns out that is the magic (approximate) number.
As another example, a return of 9% would take roughly 8 years to double (72 divided by 9 = 8 years).
It’s not exact and is just meant as an estimate. For instance, the true time for a 9% return is 8.04 years but for a quick, back-of-the-napkin calculation 8 years is close enough.
It also gets a little more inaccurate as you approach the extremes. For instance, an investment with 100% return, takes exactly a year to double, not 0.72 of a year. But as a very quick, easy formula in most cases, the rule of 72 is great to use.
Obviously, this formula isn’t just for savings accounts. Let’s say property in your local area has a long term capital growth rate of 5%. How long would you estimate it will take for your property to double in value (barring some unforeseen market hiccup)? 72 divided by 5 is 14.4 years, so you could expect your property to double in 14 or 15 years time (all things being equal).
It’s not always easy to get started. What do you need to know?
We’ve put together the most important things to know when you’re looking at buying your next Investment Property and we are giving it away for free.
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