How to Understand the Rule of 72


Does the very thought of making financial calculations make you shudder? Don't worry, here I will show you the Rule of 72, a simple mathematical formula that allows you to determine how long it will take an investment to double in value if it earns a specific rate of return--enabling you to evaluate whether or not an investment fits your objectives--the only equation you may need to know when it comes to making investment projections.

  • The rule states that the rate of return on an investment is multiplied by whatever number is needed in order to equal 72. For example, if your mutual fund has averaged 9 percent growth over time, then 9 X 8 = 72. Therefore it will take 8 years for your money to double in this fund (assuming that it continues to grow as it has in the past, of course.)

  • Apply this rule to almost any investment to see whether or not it is appropriate for you. If a CD is paying 3 percent, then The Rule of 72 mandates that it will double in value in 24 years. Therefore if you need your money to double more often than that, then you know that a CD is not an appropriate investment.

  • Use the Rule of 72 to help you determine how much you will have at the end of a given period of time. For example, if you have $10,000 to invest for 30 years, earning 6 percent interest, then 72/6 = 12. Therefore, you will have $20,000 in 12 years, $40,000 in 24 years and $80,000 in 36 years. So in 30 years, you will have perhaps around $65,000, give or take.

Tips & Warnings

  • Of course, mathematical rate of return is not the only factor to consider when analyzing investment returns. Risk must be taken into account as well, and the higher the rate of return, the greater the amount of risk you take. Consult your financial advisor for more information.

Related Searches

Promoted By Zergnet


You May Also Like

  • How to Create a Rule in Outlook 2007

    Outlook 2007 offers a rules engine that is both powerful and easy to use. Rules can be established in numerous criteria such...

  • How to Set Up a 72(t)

    Qualified retirement accounts such as 401(k)s and IRAs provide tax deferred retirement savings. Because of the tax advantage, the IRS wants to...

  • How to Use The Rule of 72 Formula

    The rule of 72 is used as a shorthand way to estimate the number of years it will take for an investment...

  • How to Figure IRA Growth

    Understanding how to figure IRA growth is an essential part of smart investing. With so many investment opportunities available today, being able...

Related Searches

Check It Out

4 Credit Myths That Are Absolutely False

Is DIY in your DNA? Become part of our maker community.
Submit Your Work!