The Rule of 72
The Rule of 72 is a classic mental math investment equation – a quick way to determine the number of years it will take to double your money with compounding interest. Although the Rule of 72 is the standard form of this investment rule, the Rule of 69 would actually be a more accurate way to calculate compounding interest. The reason why the rule of 72 was chosen instead is that it makes calculations easier, being evenly divisible by 1, 2, 3, 4, 6, 8, 9, and 12. For example:
- 2% rate of return: 72 ÷ 2 = 36 years to double
- 5% rate of return: 72 ÷ 5 = 14.4 years to double
Rule of 69
These days we all have a smartphone in our pocket, so there’s no need for mental math. Instead, for more accurate results, we’ll use the following Rule of 69 formula to calculate the doubling time of an investment:
69 ÷ percentage rate of return = number of years to double
Let’s take a look at Rule of 69 examples:
- 2% rate of return: 69 ÷ 2 = 34.5 years to double
- 5% rate of return: 69 ÷ 5 = 13.8 years to double
- 8% rate of return: 69 ÷ 8 = 8.6 years to double
Clearly, increasing the rate of return shortens the doubling time. Another way to think of it: even a small increase in rate of return can make a huge difference in the long-term health of your investment.
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