Using the Rule of 72

To use the Rule of 72, first envision a rate of return - say 5%.  With a 5% return and starting with $1000, if you keep that money earning 5% for long enough, your money will double.  You may think doubling to $2000 would take 20 years - that's logical.  20 "five percents" = 100%, right?  Make that 100% return on $1000 and your money doubles to $2000, right?

100% return will certainly double your money, but it at 5% return doesn't take 20 years.  It doesn't even take 15; it only takes 14 or so.  We know this by using 72 and diving by the percentage return (5).  72 divided by 5 = 14.4 (or about 14 years). Put another way, 14 years x 5% = 70, pretty close to 72. That's the Rule of 72.

Some other examples: At a 6% rate of return, the Rule of 72 math says it would take 12 years for the $1000 to double. 6 x 12 = 72.  At 8%, it takes 9 years - 8 x 9 = 72.  Get it?

So, in the 5% example, why were we able to double our money six years quicker than logical? Logic says 20 years will be required to double the $1000, but the Rule of 72 says only 14 years are needed. What gives? The six-year savings are the product of the compound interest, one of the most powerful forces in long-term investing. We'll look more into the power of compound interest in another section. If you want to detour there now, just click here...

If you want, think about your time horizons and achievable rates of return using the Rule of 72 to illustrate the how you can expect your investment to grow over time.