Sometimes I’m a little surprised at what some people don’t know. The Rule of 72 has been around forEVER, and yet there are loads of people who tip their heads to the side quizzically when I mention it. If you know the Rule of 72, then direct your young’un to this blog today. I’m willing to bet a nice hot cuppa that they don’t.
The Rule of 72 is an easy way to see how long it will take for your investment to double. Very often it’s used for evil: to demonstrate to people who are sticking with tried-and-true investments saving accounts and GICs just how stupid they are because the rate of return on those investments means it’ll take a very long time for their money to grow.
(BTW, you’re not stupid for investing in something you understand, that has the investment time horizon you’re looking for, and meets your needs for capital safety, no matter how many experts tell you so.)
The Rule of 72 goes like this:
72 divided by the return on your investment will give you the number of years it’ll take for your money to double in value.
So, if you’re getting 3% return on a GIC, then the formula would look like this:
72 ÷ 3 = 24 years
This formula is actually a little off, and gets more “off” as the rate of return increases, particularly when you’re looking at returns of 20% plus. (You wish, right?) But it’s handy, particularly for the math-challenged.
It can be used backwards too. Use the Rule of 72 to see just how different rates of return affect your annual compounding return. A return of 5.5% compounded means your investment will double every 13 years (72 divided by 5.5). If you manage to earn 8% on your money, your investment will double every 9 years. Earn only 2%, and it’ll take 36 years for your money to double.