The Rule of 72
I remember learning the rule of 72 back in high school and getting obsessed with this little math trick. I pretty much calculated every number under the sun for a solid month…weird kid. This number will prove helpful to you when comparing different interest rates. As well as determining how long it would take to have your money double.
I use this trick when I’m calculating what my retirement account would look like in 10, 20, and 30 years with today’s balance. This is assuming I never put another penny into the account.
Here is an example of how to do it:
Let’s say you think the stock market will give you a return of 7% over the next few years. And you want to know how soon your $5,000 investment will double. You will take the number 72 and divide it by your interest rate of 7. This means your $5,000 will turn into $10,000 in 10.28 years!
72 / 7 = 10.28
The higher the interest rate the better!
As you can see the higher your interest rate the quicker your money will double. The best investors can double your money in as little as 2.5 years. The top two investors in the world like Carl Icahn was able to return 31% year after year. Carl’s personal investment of $100,000 in his own business in 1968 through 2011 yielded those outstanding results. While Warren Buffet is touted as the best value investor he had a rate of return of 20% over that same time with Berkshire Hathaway.
Carl Icahn can double money every 2.32 years. This means your money would double over 4 times in a 10 year period. This means in 10 years your $5,000 investment could turn into over $80,000 in ten years.
Carl Icahn’s Math:
- 72 / 31% = 2.322 years in order to double.
- 10-years / 2.32 years = 4.30 are how many times your money will double in a 10 year period.
- 1st year: $5,000 initial investment x 2 = 10,000 in year 2.32
- 2.32 years: $10,000 initial investment x 2 = 20,000 in year 4.6
- 4.6 years: $20,000 initial investment x 2 = 40,000 in year 6.96
- 6.96 years: $40,000 initial investment x 2 = 80,000 in year 9.28
- Ending Year 10: $80,000 +
As you can see your rate of return really has an effect on how quickly your money will double. But don’t let this discourage you from beginning to save for the future now! I’m sure you probably are like me as well as a majority of American’s who fall in the trap of doing analysis paralysis and take no action. If you need help reach out to a financial adviser for some solutions. Ensure you choose an adviser who charges fee for service rather than a commission on what he sales you. You want your goals and his goals aligned.
Did you find this rule interesting? Do you have any other math tricks? I would love to learn about them. Start the conversation.