According to Brian Fantana, the Rule of 72 says that 72% of the time, it works every time.
Hold on…that’s not right. According to studies, it’s only 60%..and that’s a different rule than what we’re talking about here.
Our rule is even better and works 100% of the time.
For us, the Rule of 72 is just a cool little trick for estimating the time it will take your investment to double.
All you do is divide the number 72 by the interest percentage (return) that you’re getting on your investment, and voila! Like magic you get the number of years it’ll take to double your money! Two quick disclaimers (1.) it’s just an approximation and not 100% accurate down to the 100-th decimal point and (2.) it’s most accurate for compounding interest – not simple interest. Still pretty neat though huh?
Let’s try it with easy math…
Say you’ve invested $100,000 in Acme Rockets and Jet Packs and it yields a 10% annual return.
Since 72/10 = 7.2 years, this means that in a little over 7 years, your $100,000 investment is now $200,000.
Now, just in case you don’t trust me, let’s prove it. BTW this math stuff is painful for me so I hope you appreciate it!
Year 1: $100,000 principal + $10,000 interest = $110,000
Year 2: $110,000 principal + $11,000 interest = $121,000
Year 3: $121,000 principal + $12,100 interest = $133,100
Year 4: $133,100 principal + $13,310 interest = $146, 410
Year 5: $146,410 principal + $14,641 interest = $161,051
Year 6: $161,051 principal + $16,1051 interest = $177,156
Year 7: $177,156 principal + $17,715 interest = $194,871
Now to get the 0.2 (=2.4 months) it’s:
$194,871 + ($19,487).2 = $198,786.40
Ok so we’re off a little bit…but you get the point. Still a cool little trick for estimating returns right?
Here’s the rule applied for some common return percentages:
8% return = 9 years
10% return = 7.2 years
12% return = 6 years
15% return = 4.8 years
Memorize those in-and-out and you’re 100% sure to be a big hit with your friends at the bar and parties. It’s been scientifically proven to work 100% of the time.
Tags: Investing / time value of money