The Rule of 72
October 11, 2007 by Miranda Marquit
Filed under Finance
A couple of days ago, I wrote a post on the power of interest when it’s on your side. It was done using the example of what would happen if you took money you spent on the lottery and invested it instead. The results were rather dramatic. Why? Because most of the time interest follows the Rule of 72.
When investing, the Rule of 72 helps you estimate how long it would take to double your money. I have to emphasize that this is an estimate. It doesn’t always come out perfect, and you should realize that interest rates fluctuate, and you should be adding money to your investments. But it can give you an idea of how fast an investment can double your money.
An example of how the Rule of 72 works:
You divide 72 by the interest rate of your investment. If you wanted to do an online savings account (average rate is about 4.5%), you would do the following: 72/4.5=16. This means it would take 16 years for you to double your money, if you just put an amount in and let it sit.
Obviously, the more aggressive your rate of return, the faster the money builds. An aggressive stock or mutual fund with a 13% rate would double in five and a half years. But it is also much riskier than an online savings account, so you could lose your money. The Rule of 72 doesn’t take market crashes into account. This is why diversification is so important.
I very smart investor I know, who’s returns significantly beat the pro who managed most of his money, once told me that his trick when buying stock was, after careful research, to set the appreciation that he wanted from that stock as well as the decline that he was willing to accept and then SELL when either number was hit—and then stick to those numbers. All it takes phenomenal self-discipline
You’re right Miki! Discipline is the key, no matter which area you are working at in your financial life.