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How the Rule of 72 Can Help You Understand Your Investment Return

So, what is the rule of 72?  The rule of 72 is a simplified way to calculate the number of years it would take to double your money in an investment using a fixed annual interest rate.

By dividing 72 by the annual rate of return, investors can get a rough estimate of how many years it will take for the initial investment to double.

The rule of 72 is a shortcut. The rule states that you divide the rate, expressed as a percentage into 72:

Here’s an example:

Years required to double investment = 72/compound annual interest rate

Know that the compounded annual return of 9% is placed into the equation as 9, not .09, giving a result of 8 years. If you move the decimal point you get 800.

 

Here’s what it looks like with the numbers plugged in:

Years required to double investment with a 9% interest rate

72/9 = 8        NOT          72 /.09 = 800

 

I also wanted to include some averages to give you an overview of what your returns may look like by listing a few traditional bank products and their yields.

According to Bankrate here are the national APY (Annual Percentage Yield) averages for FDIC insured deposits:

1 year CD                                        1.36%

5-year CD                                      2.06 %

Savings Account                            .09%

Money Market Account               .12%

 

As you can see, these rates are not close to a 9% so the amount of time it would take to duplicate your initial deposit is significantly longer.

This leads me to briefly mention the stock market. According to Warren Buffet, if you invest in the stock market, over time the average rate of return is 6 – 7 percent. The S&P 500, using a very broad spectrum, averages a 10% return.  Using these rates of return, the time to double your investment is significantly reduced.

All you can do is put yourself in the best position you can, and understanding the rule of 72 can help when making your investment decisions.

I was very happy to find this video of this young girl explain the rule of 72 in a rather simple, yet informative way.  I hope it motivates and encourages you to learn more and step up your efforts to educate your children about money.

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About Touya Kelley

Touya Kelley has spent the last 5 years of her life offering financial solutions to people. On her personal finance blog Break Free And Win, her goal is to help and encourage others to manage God's money well.

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