1. You have a question
2. About how long it will take your investments to double
3. You ask your financial professional
4. Who shares the idea of
5. Dividing 72 by the percentage of the return
6. This all equals this idea called Rule of 72
Let us piece this together
You have a question on how to figure out how long it will take for your money to double in your current investments. So you ask your financial professional to teach you how to calculate this. Your financial professional explains this idea of dividing the average rate of return by 72, which will give you a number, that represents a number of years it will take your money to double! This all equals this inside trick called the Rule of 72
What is Rule of 72
This is a useful shortcut that will help you figure out how many years it will take to double your money. The rule states that you need to take the number 72 and divide it by the compound interest rate.
Another benefit to this rule is it can help you figure out how long it will take your money to lose its value by half. You can take the rate of inflation and plug it in as the same number in your equation where you would put the compound interest rate. #doubleuse
Your average compound interest rate is 8% and you invest $10,000 so you take
72 ÷ 8= 9
So it would take 9 years at an 8% return rate to turn $10,000 into $20,000.
Note: You leave 8% as 8, not .08
Why You Care
• Usually you would need a calculator to try to calculate compound interest because they use a logarithmic function, ya those Ln. things from school
• This is a quick easy way to figure out compound in your head
• it is good to know when you start investing how long you are looking at to get to a goal that you want.