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Do you ever wonder how long it would take for your invested money to double?
If so, you are not alone.
There is a whole field of study devoted to answering this question, called financial mathematics.
And one of the most popular methods for estimating doubling time is the Rule of 72.
In this blog post, we will discuss the rule of 72, how to use it, and how accurate it is. We will also show you how to apply this rule to your investment planning so that you can make smart decisions about your money!
Table of Contents
What Is the Rule of 72?
The rule is a simple formula that can help you estimate how long it will take for an investment to double in value. The rule is based on the idea that investments grow at a compound interest rate. It shows how many years it will take for an investment to double if it grows at a given compound interest rate.
Think of it as a financial tool to help you understand the power of compounding!
The rule of 72 was developed by a 19th-century Italian mathematician named Leonardo Pisano, also known as Fibonacci.
It can be used for any investment, including stocks, bonds, and savings accounts.
You can use this rule to estimate the doubling time if you know the compound interest rate.
The Formula for the Rule of 72
The rule of 72 formula is as follows:
72 / Compound Annual Growth Rate = the number of years until your money doubles.
For example, if you are earning a 12% compound annual return on your investment, it would take approximately 72/12 = 6 years for your money to double.
A great way to use the formula is to estimate how long it will take for an investment to double.
The rule cannot be used to estimate other financial goals, such as how much money you will have after a certain number of years.
It is also important to know that the rule of 72 only applies to investments that compound interest regularly.
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How Accurate Is the Rule of 72?
The rule of 72 is not an exact science. It’s a general guideline that can help you estimate how long it will take for your money to grow.
The math is accurate, but often investments won’t have a fixed interest rate.
In addition, the rule of 72 doesn’t take into account any fees or taxes that may be associated with your investment.
So, the rule of 72 can give you a general idea of how long it will take for your money to grow.
Talk to a financial advisor to get a more specific estimate when it comes to your own investments.
In general, the rule of 72 is accurate, but you must consider other factors that may affect your situation.
When using the rule of 72 for your investment planning, it’s important to be mindful of these variables.
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How to Use the Rule of 72 for Your Investment Planning
Now that you know the rule of 72 and how it works, you can start using it to help make investment decisions.
For example, let’s say you are considering investing in a stock with a history of growing at a rate of 20% per year.
Using the rule of 72, we can estimate that it would take approximately 72/20 = roughly 3.6 years for your investment to double in value.
This can be a beneficial way to compare different investments and decide which one is right for you.
You can also use the rule of 72 to see how much your investment would compound and double over and over again.
Imagine you had a $1000 investment that doubled every four years. That would be an 18% interest rate (72/16 = 4).
After only 12 years, you would have $8000.
Now, let’s explore the wonders of compound interest and stretch the timeline to 24 years.
After 24 years, assuming a consistent 18% interest rate minus fees and other expenses, you would have $64,000.
As you can see, with just $1000 and a little time, the rule of 72 can have your money working hard for you.
You would have made $63,000 in profit for no extra work. Consistent contributions and a larger initial investment can increase this.
Let’s say you have just $5000 instead of $1000; here is what the rule of 72 shows us:
After only 12 years, you would have $40,000. In 24 years, your investment of $5000 would grow to $320,000.
With the rule of 72, you can get a quick estimate of how your investment will grow over time. This can be helpful when you’re trying to decide how to invest your money.
The rule of 72 can Estimate How to Pay Off Debt
For example, let’s say you have a credit card with a balance of $1000 and an interest rate of 18%.
If you missed your four-year payments your debt would double to $2000 (72/18 = 4). After another four years, you would owe an additional $2000 with a total of $4000 in debt.
The rule of 42 can be used to see how quickly debt can compound out of control.
It’s a clear mathematical model that depicts the potential scenario if you don’t take action to get your debt under control.
This rule can help you plan and budget for your debt repayment. It also shows how compounding can also work against you if you’re not careful.
The rule of 72 can be a helpful tool when you’re trying to make financial decisions.
It’s important to remember that the rule is just an estimate and other factors can affect your specific situation.
Always speak to a financial advisor to get the most accurate information for your circumstances when in doubt.
In Summary
In conclusion, the rule of 72 is a helpful tool that can estimate how long your money will take to grow.
However, the rule of 42 only works if you have a fixed interest rate and doesn’t consider any fees or taxes.
The rule can be used to predict both investment growth and debt repayment.
When using the rule of 72, it’s important to remember that it’s just an estimate and other factors can affect your specific situation.
Always speak to a financial advisor to get the most accurate information for your circumstances when in doubt.
Disclaimer:
We hope the information in this article provides valuable insights to every reader but we, the Biesingers, are not financial advisors. When making your personal finance decisions, research multiple sources and/or receive advice from a licensed professional. As always, we wish you the best in your pursuit of financial independence!
