Friday, June 21, 2024
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The Rule of 72: Time to Double Investments

Here’s a nice little trick that you can use to calculate approximately how long it’ll take to double your money. If you are re-investing your profits, then there is a simple maths trick and it’s commonly known as ‘The Rule of 72’.

Years to Double Investment = 72 / Annual rate of return.

E.g. If you manage to get a savings account with 5% interest. 72/5 = 14.4 Therefore it’ll take just over 14 years to double your money.

Obviously the rule of 72 is to double, but what is the rule for tripling your money?

Well it’s the rule of 115!

Years to Triple Investment = 115 / Annual rate of return.

E.g. A savings account with 5% interest. 115/5 = 23 Therefore it’ll take 23 years to triple your money.

If you’re keen to have a play around with similar figures, see our article on compound interest.

What about halving your investment?

You might have an account with no interest, therefore if there is inflation, this money is devaluing. Likewise a global economy might by shrinking by a certain % each year. Well the strange thing is that you can use the same rule.

For example if inflation is 3% and you have money as cash then 72/3 = 24 years. It’ll take 24 years for your money to halve in value relatively.

The rule of 70 & 69.

The rule of 72 is commonly used because so many numbers divide easily into it. However a more accurate figure to use is probably 69.3. But lets be honest this takes the fun out of it. So it’s probably best to use 70…. or 72.

Slight warnings …

There are several reasons why you want to take the rule of 72 light heartedly though. In reality nothing is ever that smooth.

It ignores taxes: Although there are tax free savings options around, such as investing in an ISA , you might need to calculate the % return after tax.  

Predicting the interest rate is far harder than you might think: In fact, it’s practically impossible in the long term to predict. Long term savings accounts and bonds can be more structured. With Stocks and shares the percentages are far more volatile. It also ignores the risk side of things. For example, if you’re putting your money in the stock market there might be a major crash. You might earn 10% for 4 years but lose 50% in one! You could end up with a negative overall return in your 5th year.

Please note on Rule of 72