I remember the first time I learned about how compound interest can work for you. I was introduced by a friend to someone in the financial services industry and he explained a simple technique to easily calculate how compound interest can work for you – the Rule of 72. I was so excited and started running numbers. I was really amazed that I never once learned this in school. How could we miss such an important bit of information?
Of all the things you can learn about money –the rule of 72 should be at the top of your list.
To estimate how long it takes for your money to double, simply divide 72 by the interest rate. The result is how many years it will take for your money to double at that rate. For example, let’s assume you can earn a 6% rate of return. How long will it take $1,000 to grow into $2,000?
72 / 6 percent = 12 years
In this example, if you invested $1,000 into an account that earned a flat 6% annual rate of return, after 12 years, your investment would be worth around $2,000. Conversely if you want your money to double in 6 years you would need to be earning 12% interest (net of taxes and fees).
So if you are saving to buy a home and want to save a certain amount in a certain amount of time you could use this simple rule to estimate how much interest you would have to earn to reach your goal. If you want to pay off student debt or save to invest this is an easy way to do some calculations.
While I encourage people to lower their debt it is always good to make your money work for you as well. I love the rule of 72 and think everyone should know about it as well. Pass this on!
To save a little time, here are some interest rates and the corresponding amount of time to double:
1% – 72 years 2% – 36 years 3% – 24 years 4% – 18 years 5% – 14 years 6% – 12 years 7% – 10.3 years 8% – 9.0 years 9% – 8.0 years 10% – 7.2 years