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.