“The Rule of 72” – Do YOU know what it is?
You’re about to find out why you need to know it – and the practical ways that you can use it in your life.
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The rule of 72 says that you can find a good estimate of time of how long it will take for your money to double.
It’s this simple:
Take the number 72 and divide it by your interest rate.
Keep in mind: when you are diving the interest rate (let’s say it’s 7%) you divide the whole number, not the decimal. With this example, you would:
Divide 72 by 7 = 10
This would tell you that it would ROUGHLY take you 10 years to double your money if you were getting 7% annual rate of return.
Why is this rule beneficial for you?
The number 1 reason –
It allows you to quickly evaluate an investment or financial decision.
If you are thinking about investing in the stock market or real estate, for example, and you are wondering how long it will take how long it will be until your money doubles – you can quickly gather what your expected rate of return is and divide 72 by that number. You will immediately find a rough number for how many years your money will double.
From there, you can make other decisions, such as –
- Is this a good investment decision?
- Is that the time frame I am looking for to double my investment?
- Is there something else I should be doing with this money?
You can quickly sum up and evaluate an investment opportunity with this rule.
The Top Ways You Can Use This Rule in Your Daily Life:
1.) Your 401K Account
Take a look at your 401K and the annual percentage of return. If it’s 5% for example, it will take you about 14 years to double what is in your current account right now (assuming the 5% stays constant). That is not including the contributions you will make to it.
2.) Your Money in the Bank / “CD”
If you have money in the bank accumulating interest, you can quickly see when that money would double using “The Rule of 72”. Then you can analyze if there are better ways to be using that money.
For example, you may be getting .25% interest annually with your money in the bank.
That would take 288 years to double your money. Perhaps you would want to move your money into a higher interest bearing account OR another guaranteed fund.
3.) Your Financial Goals
You can actually “reverse engineer” the rule to help you with your financial goals and then back into it to determine the percentage you need to earn or the amount of time it will take to hit that goal.
For example, if you have $5,000 and you can earn 10% a year on it.
Take the Rule of 72 divide it by 10 and you can see it would double in 7.2 years.
What if you wanted it to double in less time than that?
You would reverse it.
72 divided by X (being the percentage you need it to return on) = the time you want to double
That’s the rule of 72!
Now you know how it works and a few ways in which you can immediately start implementing it to make smarter investments and help you with your current ones.
If you need to quickly evaluate a potential investment or financial decision, now you have a RULE to help you.
Comment below – what way do you want to start using “The Rule of 72” today?