Before you start investing your money, it’s important to figure out what you need to do in order to maximize your returns and ensure that you are investing enough to build up the wealth you need to succeed in the long run.

Have you heard of the Rule of 72?

The Rule of 72 is a great tool that every investor should use – it helps you quickly understand how long it will take for money to double at a certain interest rate. It takes into account the impact of compound interest, allowing you to get a quick idea of what you can achieve with your money.

Let’s take a look at how this works.

How Long Will It Take to Double My Money?

If you want to quickly figure out how long it would take to double your money, use the rule of 72.

72 divided by interest rate = number of years to double your money

Example:

• If you receive a 6% interest rate, divide 72 by 6, which gives you 12. This means it will take you 12 years to double your money if it’s growing at a rate of 6%.
• If you receive a 8% interest rate, divide 72 by 8, which gives you 9. This means it will take you 9 years to double your money if it’s growing at the rate of 8%
• Suppose you invest Php 5,000 at a compound interest rate of 10%. The rule of 72 tells you that your money will double every seven years, approximately: Year 1 (Php 5,000), Year 7 (Php 10,000), Year 14 (Php 20,000), Year 21 (Php 40,000)

*We’re assuming the interest is annually compounded. This rule is remarkably accurate as long as the interest rate is less than 20%

 

How Much Should My Interest Rate be to Double My Money?

You can also use the rule of 72 to quickly figure out how much the interest should be to double your money.

72 divided by the number of years to double your money = interest rate

Example:

• If you know you want to double your money in eight years, divide 72 by 8 to find that it will need to find a 9% interest rate to achieve that.
• If you know you want to double your money in ten years, divide 72 by 10 to find that it will need to find a 7.2% interest rate to achieve that.

 

When Will My Money be Half-Worth Due to Inflation?

You can also use the Rule of 72 to quickly estimate the impact of inflation on your portfolio (or better, the buying power of the earnings of your portfolio). You can use this to help you plan your retirement spending.

72 divided by inflation rate = number of years the value of the money will be reduced into half

Example:

• If inflation rate is 3%, it will take 24 years for the value of P1.00 to be worth Php0.50. If you plan on retiring in 24 years, you’re going to need about double your current expenses to live off of based on inflation.

Keep in mind that the Rule of 72 is just a guideline. This is simply a quick-math tool to help illustrate the impact that time and rate of return has on your money. Hope you learned something new. =)

photo credit: 1/52 Every journey begins with coffee via photopin (license)