by How long will it take to double your investment? Find out below using Rule of 72 investing.
Contents
Estimate the number of years it will take to double your investment, given a rate of return
To calculate approximately how long it will take to double your investment given a rate of return, just divide 72 by the return rate to determine approximately how quickly your investment will double in years.
Rule of 72 example #1
Known: Interest rate of 6%
Unknown: How many years will it take to double my investment?
72 divided by 6 = 12
Your investment should double in approximately 12 years.
In other words, if you invested $1000 at an interest rate of 6%, you will have $2000 in about 12 years. The exact answer is 11.9 years. Pretty close right?
Don’t believe me? You can check the answer here for yourself.
Estimate the rate of return, given the number of years it will take to double your investment
Similarly, to calculate the rate of return given the number of years it will take to double your investment, just divide 72 by the number of years.
Rule of 72 example #2
Known: Number of years it take to double my investment: 8
Unknown: Interest rate
72 divided by 8 = 9
In other words, if you invested $1000 which doubled to $2000 in 8 years, then your annual rate of return was approximately 9%. The exact answer is 9.05%. Our estimate was extremely close the actually answer.
Stop Making Poor Investment Decisions
Let’s say a promising young go-getter approaches you with a business proposition. Her proposal promises to double your investment in 6 years at an interest rate of 8%.
You could embarrassingly take out your laptop to double check the accuracy of these numbers.
OR you could quickly do the simple calculations in your head to immediately tell that one of these numbers in her proposal is completely wrong. If the investment doubled in 6 years, the interest rate would be about 12%, not 8%.
Conversely, if the interest rate was 8%, the investment would double every 9 years, not 6.
So you know one of their numbers is inaccurate. When you ask her why the numbers don’t make sense, she sweats nervously and doesn’t know how to answer your question. You reject the proposal, knowing that you can’t trust a business partner who can’t answer simple investment questions. Their business quickly goes under, and you just saved yourself from investing in a partner with fraudulent numbers. Good for you. All thanks to the rule of 72!!
Putting it all together
Rule of 72 investing can help you do three things:
- Estimate the number of years it will take to double your investment, given a rate of return
- Estimate the rate of return, given the number of years it will take to double your investment
- Prevent you from getting scammed by a smooth-talking venture capitalist, letting your investments grow and bringing you closer to financial freedom!
Take a look at common investments, and calculate how quickly your investment will double given their historical returns. You might be pleasantly surprised!
Let me know in the comments below!
Have you heard of the Rule of 72? Has it affected your investment strategy?
