A Guide To Financial Planning By FinancialPlannerSite.com

Rule of 72

The Rule of 72 is a quick and easy ‘rule of thumb’ method for investors to work out how long it is likely to take for their invested money to double, given a constant rate of interest.

To apply the Rule of 72, all you need to do is to divide 72 by the interest rate. For example, if you invest $500 into company stocks that pay 12% interest, your money can be expected to double to $1000 over a period of 6 years, since 72 divided by 12 equals 6.

The reason this is known as the Rule of 72 is that at an interest rate of 10%, your money is likely to double every 7.2 years. Since the rule applies repeatedly over time, given a constant rate of interest, your initial investment can be expected to yield great returns in the long run. For example, an investment of just $50 at a 10% interest rate can be expected to increase to $800 over a period of approximately 35 years.

In the same way, the Rule of 72 can be used to forecast the timescale within which debts can be expected to double, given a particular interest rate. This is a useful exercise for those borrowing money from banks and credit card companies.

At the level of the economy, the Rule of 72 can also be used to predict future rates of inflation. If the current inflation rate is 5%, for example, prices can be expected to have doubled after 14 years (72 divided by 5 = 14).

The Rule of 72 applies to all investments including real estate, 401k Plans, stocks and mutual funds.

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