Skip to main content

The rule of 72

Here's a superquick way to work out how much money your investments might make.

No need for fancy exponential maths. Just simple division and some doubling. Maybe you can even do it it your head.

The rule of 72

Years to double = 72 / growth rate

That's it. Pretty simple. Just 72 divided by a number.

Working out the double-time

So a 2% investment would take 36 years to double in value. (72 divided by 2)

At 6% it would take 12 years, and at 8% it would take 9 years.

How many doubles?

Let's say someone is investing $50k for 36 years.

  • At 2%, it would double once. Result $100k.

  • At 6%, it would double three times. (36 years divided by 12 years).
    Three doubles means it becomes 100k, 200k, then $400k.

  • At 8%, it would double four times. (36 years divided by 9 years).
    Four doubles means it becomes 100k, 200k, 400k, then $800k.

This is astounding

I was stunned when I first came across this. I probably still am.

It's amazing to think that moving from 2% to 6% changes things a $50k gain into a $350k gain. That's triple the rate of growth, but seven times the amount of earnings.

Perhaps even weirder is that the small percentage change (from 6% to 8%) adds another $400k.

I guess that's the awesome power of doubling.

Real-world effect

Discovering this has motivated me on to invest more money. I had most of my money just sitting in savings accounts. I had intended to invest, but hadn't got around to it. (To be clear I'm talking about money that I won't need to spend for years).

Then I saw the maths. Even by investing a smaller amount (compared to the earlier example) and for a shorter time; the long-term benefit is greater than a year's wages. Realising that fact really drove the message home.

If making that investment has the same financial effect as working for a whole year, I know which I'd prefer to do. What a simple way to free up a year of my life, with no damage to my long-term financial health.

Starting early

While I discovered the rule of 72 only recently, those who discover it at a younger age have a real benefit. The early someone starts, the more doubling they can do. It could make an enormous difference to their future selves.

But wait, there's less

This is not about become a mega-multi-millionaire. This is about realising that there are different ways to fund our life.

We don't have to trade away all our time for money. We can spend more of our time doing meaningful things, helping others, and generally doing the things that light us up.

Hopefully we can use the rule of 72 to make sure we're not trapped in a job until 72.

More on Money

This is part of my money maths series. Not financial advice. Just showing the simple maths that can make a real difference to our lives.

For a more detailed way to calculated investment returns, see the magic of compound growth.

For future articles, subscribe to my monthly(-ish) email.

Disclaimer

This information is general in nature and does not take into account your personal situation. It is not financial advice. If you need specific advice on your circumstances or finances you should speak to an expert.

Comments

Popular posts from this blog

Simple phone

I get my fair share of teasing for still using a Nokia phone. So I feel quite vindicated that someone has now invented a new non-smartphone . It's pitched for those who want a decluttered life. Instead of features, its selling points are things like "reclaim a little quietude from the constant intrusions of technology", "no internet connection, no app store and definitely no camera for taking selfies". One quote from the article said "as smartphones get bigger and bulkier, there is a place for something small and simplified, without all the functions." That kind of statement resonates with me. Not just for phones, but for so many areas of life - including the houses we live in.

Why own a car, when you can go get?

That's the slogan of one company providing an alternative to car ownership. Here's our experience with them. Why not just have our own car? Another time I'll write a full post about that, but suffice to say that car ownership is a pain in the neck. The servicing, the maintenance, the repairs, the parking, the traffic, the registration, the insurance, the cleaning... For my wife and I, about 98% of our transport needs can be done on foot, by bike, by train, bus or ferry. Maybe 99% if you include rideshare. So we choose to avoid the pain (and cost) of car ownership. However, car use (I think of it separately from car ownership) can be handy in certain situations. We had one of those situations last weekend. Here's how it went. Booking a car My wife signed up for GoGet , and booked the car online for the time window she needed it. As a first-timer, she received her little membership card in the mail. On the day of the booking, GoGet sent her a reminder email about 20 minut...

The Latte Factor

For the first time ever I'm reviewing a novel. Latte Factor is a short story  - around 120 pages - and is equal parts of inspirational story and financial education. The combination of the two is quite rare, and done quite nicely. The story is about Zoey Daniels, associate editor for a travel magazine. Although she's never been outside the USA  - "a travel editor who's never travelled". She struggles with money and is considering a higher-paying job at the company her friend Jessica works for. The job would provide more income, but would also be more stressful and demanding. She already has a nightmare about being on an increasingly-fast treadmill that she struggles to stay on. Her current boss Barbara - aware only of the money situation - suggests she talk to Henry at the coffee shop. This peculiar suggestion is where Zoey's life begins to turn a corner. Spoiler Alert Being a book of fiction, I don't want to spoil the story for you. It's a book you ca...