The rule of 72 is a mathematical concept that can help you manage your money and finances better.
If you understand this simple concept, it can give you a better grasp on concepts like compound interest, inflation, and investment growth over time.
Understanding the Rule
Essentially, the rule of 72 helps estimate how long it will take for an investment to double in value, or the effects of inflation.
What’s nice about this rule is that you don’t even need to use a calculator.
To figure out investments, it just requires a quick mental calculation to estimate the number of years it will take for an investment to double in value at a fixed annual rate of return.
Simply divide 72 by the annual rate of return on your investment. The result is the approximate number of years it will take for your investment to double.
For example, if you invest money that earns 6% per year, it will take 12 years (72 ÷ 6) for that investment to double in value. This is useful when you’re comparing investment opportunities or setting realistic financial goals.
On the flip side, you can also use the rule of 72 to estimate the annual growth rate needed to double an investment in a specific time period. Just divide 72 by the number of years to get the required growth rate.
If you want your investment to double in 10 years, you’ll need to achieve 7.2% (72 ÷ 10) in annual growth. This is helpful in terms of knowing whether you’ll need to adjust your investment strategy based on your goals.
Calculating inflation and debt
The rule of 72 can also help you assess the impact of inflation on your savings. For example, if the rate of inflation is 3%, use the rule of 72 to calculate how many years prices will double. 72 divided by 3 is 24, so in about 24 years.
Knowing this can prepare you in terms of how much you should be saving and investing in order to combat the erosion of the purchasing power of your money.
You can also make use of the rule of 72 to evaluate your debt payoff plan by estimating how quickly you’ll be able to eliminate your outstanding loans if you double your monthly payments.
Suppose you have a student loan with an interest rate of 6%. By doubling your monthly payments, you’d be able to pay off your loan in around 12 years (72 ÷ 6 = 12). But if you maintain your original monthly payment schedule, it would take you around twice as long to be free of this debt.
This can motivate you to explore strategies that could help you become debt free sooner and reduce the total interest you paid over time.
Final Thoughts
Is the rule of 72 completely accurate? It’s not accurate, but it’s simple tool that gets you close to the real number.
If you want an exact calculation, you’ll need to use an online tool or a compound interest calculator. But the rule of 72 it can give you an easy and quick way to estimate the time or rate of growth for things like compound interest, inflation, and investment returns
