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

Colour me happy

One of the great things about reducing possessions is thing called 'helper's high' . It's that fuzzy feeling you get from helping someone else out. I got one recently by helping an old man lift heavy groceries into his car boot when he was struggling. But this is not about that. I was about to put some watercolour paints online for anyone who wanted them. Then I remembered a local community group where people do art therapy. I gave the paints to a contact who passed them on to the group. The next day my contact called me to say how much they were appreciated. One of the participants wanted to do some watercolour painting, but couldn't afford the paints. When my contact walked in with free paints the participant was overjoyed to be able to do her art. As far as 'helper's highs' go, this was a slightly removed one - I never met the actual person I helped. But still it was a buzz.

How to waste a year's wages

A friend recently asked me why it is that so many people (on good incomes) are struggling to save. Often the big three money areas are housing, transport and food. In one sense these are necessary items. But what we spend on them is often way more than necessary. I crunched some numbers on how much extra my wife and I could spend on these things - if for some reason we wanted to burn our money. 1. Housing Our apartment is fairly nice, but also cost-effective. I've mentioned how choosing it saves us $1,800 per year , compared to a similar one we saw. The high end of 2-bedroom apartments in our suburb is $305 per week more than our apartment. Not $305 per week. $305 per week more than ours is. I cannot get over that. Sure it's new and modern-looking, but that's a lot of money. It's an extra $15,860 per year above what we pay. 2. Transport The Australian Automobile Association lists the costs of owning and running a car. It includes many often-overlooked c...

Man Down

How is it possible for a book to be depressing, supportive and hopeful all at once? Man Down looks at the problems men have today and how it managed to get this way. What price 'success'? It seems so many of the problems come from the external pressure to be a 'success' - whatever that means. Over time this pressure becomes internal and drives us to make decisions to satisfy that pressure, but which are detrimental in so many other ways. It can be the pressure to take a 'successful' career, though it's one we don't want or aren't suited for. Or to take a promotion, because salary is apparently success - or at least it buys all the things that signal success to others.  The promotion only means more pressure, less sleep, and poorer health. At the same time the extra responsibility takes away from our ability to exercise, take care of our health and form social connections. The lack of social connections means that retiring is one of the most dangerou...