Benefits of Saving Using the Investing Rule of 72
There are many different tools, techniques, and tips that can assist you in improving savings and investments. One popular one that you might want to check out is the Investing Rule of 72. Using just a little bit of simple math, you can figure out how long it will take you to double your investment.
What is the Investing Rule of 72?
The Investing Rule of 72 is a quick-and-easy way to figure out how many years it will take to double an investment you have made.
For example, let’s say that you invest $2000 into a fixed-rate CD. You want to know how long it will take to double it up to $4000. That information might even help you decide the length of CD you want to choose.
The investing rule of 72 will provide you with the answer. It will tell you, based on your annual rate of return, how long it will take to double your investment.
Investing Rule of 72: The Math
All that you need to know in order to use the investing rule of 72 is what your annual interest rate (rate of return is). Of course, it’s also helpful to know how much you are investing, since that’s what gives you the number that you’ll have in the bank at the end of the investment period.
Then you just do this math: Divide the number 72 by the interest rate. The answer is how many years it will take to double your investment.
Use this personal finance calculator to do the math for you.
How Long Does It Take to Double an Investment?
Obviously 72 divided by 1 is 72, so let’s first use that as an example. If you invest a specific amount at a meager 1% interest rate, then it will take 72 years to double that amount. Therefore, if you invested $10000 at 1% then in 72 years you would have $20000 in that account.
Of course, nobody wants to wait 72 years to double their investment. So, let’s say that you’re able to find a terrific savings account that gives you 10% interest. 72 divided by 10 is 7.2. Therefore, it would take just over seven years to double your investment. If you invested $10000 at 10% then in just over 7 years, you’ll have $20000 in that account.
How to Use the Investing Rule of 72 to Improve Savings
This is simply a tool to help you better understand your money. Interest rates can get confusing. Therefore, you might not exactly understand how much money you can expect in the future when you invest in various savings accounts today. This tool increases that understanding. The more you understand your money, the better the decisions that you can make.
So, obviously, you’ve always known that you would rather have 10% interest than 1% interest on your investments. But now you understand what this means in terms of actual numbers and the length of time it takes to double your money. Doubling your money is a tangible goal that you can readily understand.
Therefore, you can use this information to make plans for your finances. If you know that you want to have X amount of money in Y years then you can figure out how much you have to invest and what interest rate you would require in order to meet that goal.
For example, let’s say that you know you want to have $40000 saved for your child’s college education. They will be going to college in ten years. You currently have $20000. Therefore, you need to double your investment in ten years. Do the math to figure out what interest rate you need to make that happen. (72 divided by 10 is 7.2; therefore, you need at least 7.2% rate of return to double your money in ten years.)
Use the Investing Rule of 72 to Understand Debt
As CNBC points out, you can also use this formula to figure out how much money your lenders are making off of you. In other words, you can enter your credit card’s interest rate into the math for the investing rule of 72 to find out how fast they’ve doubled your money and put it into their pockets.
For example, if you have a credit card balance with a 10% interest rate, we already know that’s going to double in about seven years. Of course, there are variable interest rates to consider. Moreover, as you pay down your debt, the numbers will change. But the investing rule of 72 gives you good insight into how fast they’ll be taking your money if you only make the minimum payment.
How does this help you? More than anything else, it offers incentive. If you realize that the credit card company is going to double your money (straight into their coffers) in seven years, it might remind you that you don’t want that to happen. You want that money in your pocket. While you always know that, it becomes more tangible when you think about how few years it takes to double your losses. This can help you resist impulse buys and pay down that debt.
It can also help you think twice about purchases. After all, if you realize that the $1000 you’re spending at 20% interest rate will become $2000 in less than four years, then you might think twice about spending that money at all. If you’re really smart, you’ll put that money into savings and let it grow for you instead of against you!
Is the Investing Rule of 72 Accurate?
The Investing Rule of72 isn’t exact. However, it gives you a fairly accurate number. It is particularly accurate with interest rates between 7% and 9%. Rates that are lower or higher vary a little bit.
For example, with an interest rate of 2% it takes you 35 years to double your investment, although the investing rule of 72 will tell you that it takes 36 years.
Similarly, with an interest rate of 25% it takes you 3.11 years to double your investment, although the investing rule of 72 will tell you that it takes 2.9 years.
So, there are some slight inaccuracies when using this tool. That said, if you’re using it for planning and incentive towards saving then it’s accurate enough to meet your needs.
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