The top pros in any business have little tips and tricks they use to make their jobs easier. The finance industry is no different. One of their little tricks is called the Rule of 72.
The Rule of 72
Do you know how long it takes for your investments to double? There is a quick and easy formula to estimate it. It is called the Rule of 72. Take your return or interest rate and divide it into 72. The answer will be the approximate number of years it takes to double your money. Example: If your investments are earning you 8%, divide 8 into 72 and you get 9 years. The formula looks like this: 72 divided by 8 = 9 72 divided by 10 = 7.2 Your money would double in 9 or 7.2 years respectively
Is the Rule of 72 exact?
No, not exactly, but it is pretty close. A 2% rate would double in 36 years based on the rule of thumb vs 35 years for the actual number. An 8% rate doubles in 9 vs 9.01 years and an 18% rate doubles in 4 vs. 4.10 years.
You can see it is not perfect but it is pretty good for a ball park estimate. You certainly wouldn’t use it anytime you needed to calculate real returns, However it is perfect for a quick off the top of your head number.
Using the Rule of 72
So lets say you go into a bank and ask how much their CD rates are. When they tell you 4% a little math in your head and you know it will take about 36 years for our money to double. It might make you rethink those low rates.
Often the results are round numbers, making it an easy calculation you can do in your head. Even for those without a good head for numbers, a few keystrokes on the calculator, and your friends will think you are a genius. When you want to figure how fast your earnings will grow, just remember the Rule of 72.
Source by Ned Carey