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Doubling your money is easy. Seriously.
Let’s see, you could walk away with double your money by:
- Placing your chips on the roulette table. Wesley says “Always bet on black.”
- Any variation of #1 at the blackjack, craps, poker table or sports book.
- Bet against the housing market at the perfect moment in history, à la The Big Short.
- Collect your Nigerian lottery winnings. The return on this one is actually way more than double according to the e-mails.
Do you see a pattern here? The odds are stacked against you. You might double your money, or walk away with nothing. I don’t want you to lose all your money.
A more surefire way to double your money requires a few key ingredients: time, return, trust and math.
Time to grow. Return of your initial investment plus a percentage more. Trust that the investment will continue to grow and not fall to zero, and Math guided by the Rule of 72.
The Rule of 72 will tell you how long it will take for your money to double at a given rate of return. 72 is the product if you like multiplication. It’s the numerator if you’re into fractions.
Double Your Money with the Rule of 72!
Pop quiz, hot shot! How long will it take for your money to double at 4% interest?
18 years.
What about a 12% return?
6 years.
A 24% clip?
3 years.
9%?
8 years.
How accurate are these numbers? They’re awfully close, particularly for annual compounding and a steady rate of return. For daily compounding, the Rule of 69 would be more accurate, but unless you’re getting returns of 3% or 23%, you’re dealing with fractions and remainders and that’s not easy head-math.
72 is head-math friendly. 2 x 36. 3 x 24. 4 x 18. 6 x 12. 8 x 9.
If you don’t like using your noggin, I made you a nifty Rule of 72 Calculator.
Using a Rule of 70 is a decent approximation too for numbers that don’t jive well with 72. 5 x 14. 7 x 10.
My father taught me the Rule of 72 when I was a teenager. That was in the late 1980’s / early 1990’s. The S&P 500 posted annual gains exceeding 20% in ten of the twenty years in those 2 decades, with only two negative years where losses were < 5%. It was a good time to be invested, and a good time for me to appreciate the power of the rule.
With a compound annual growth rate of 18%, money was doubling about every 4 years on average. It’s unlikely we’ll see returns like that in the next decade, but returns of 2, 4, 6, or 8 percent make for easy calculations, too.
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Harness the power of the Rule of 72
It can help you plan and project. Let’s say you’ve saved up $250,000, but you want to be a millionaire. You need to double your money twice. With 6% interest, that will take 12 + 12 years, so 24 years. If you can somehow get 12% like Dave Ramsey says you will, you’ll have your million in 6 + 6 years, so just 12 years. Twice the return, half the time. Excellent.
If you’re starting with $250,000 and also investing $50,000 a year, you can add $500,000 in ten years, your original $250,000 will have nearly doubled, and your earlier annual $50,000 investments will have had time to grow. You can roughly estimate you could be a millionaire within 10 years, even at the 6% rate of return.
A compound interest calculator can be useful in these more complex situations. Using the numbers above with 6% interest, it actually takes about 9 years for your investments to grow to $1,000,000.
A caveat worth mentioning is that the Rule of 72 works best with a steady rate of return. The higher the volatility, the lower your returns. Knowing the Compound Annual Growth Rate (a complex calculation that delivers a constant rate of return from a variety of different returns) will give you an accurate result using the Rule of 72.
A Dollar Saved is Four Dollars Later
By convincing you not to blow your money. I’ll ask myself a simple question when considering any significant purchase or upgrade. Would I rather spend $1,000 now or have $2,000 to spend in about ten years (assuming 7.2% returns)?
I can buy a $25,000 car or the $75,000 Maserati I parked next to at the brewery recently. That $50,000 difference will likely be closer to $200,000 in about twenty years, not to mention the increased and sunken cost of maintenance and insurance on the Maserati.
Would the Maserati be more fun to drive? Sure, especially at first. Once the shine wears off, you might wish you had a Ferrari. If you really want to drive one of those cars, rent one for the day at the nearest track. Make it a treat.
When did you first learn about the Rule of 72? Who taught you? I am grateful to my Dad for helping me understand the power of compounding at a young age. If you just learned this bit of magic today, I’m glad to be the one to share it with you.
45 thoughts on “Double Your Money with the Rule of 72”
[…] can use the Rule of 72 (how long it takes money to double) to roughly determine how inflation could affect your […]
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Contemplating a car purchase. Will apply this rule 72 in considering my purchase
As long as you’re not chasing ambulances with that car, I don’t care what you do!
Cheers,
-PoF
We did not have much by way of financial education or good examples in high school. I was lucky that my Latin teacher wanted to make sure that everyone knew that they needed their own money and could not rely on a spouse (with the horrible anecdote of her own early life). She made sure we knew to earn our own so that we would never be broke with kids, which many of my classmates went on to learn the hard way after not listening to her and dropping out. I did not hear it as the Rule of 72 until a Financial Independence Lunch Brown Bag in college. Powerful stuff.
I’m not sure how many people are able to say they learned some really valuable money lessons in their Latin language class. 🙂
Great post! Definitely one of the most simple concepts of finances and I personally learned this in middle school. My economics teacher also explained what a Roth IRA was, which was even more impressive at that class age!
That’s awesome! I had an entire year of Macroeconomics in high school, but hardly a lick of personal finance. Everything I know I learned from my parents, then books, and now the wonderful internet.
Cheers!
-PoF
Great post. If only you’d written this article and mailed it to me 25 years ago :-). The Internet is so awesome. I wish I had it as a teenager.
Let me fire up the Delorean and check on the flux capacitor and I’ll see what I can do.
Cheers!
-PoF
I remember hearing about the Rule of 72 when I was younger and now I’m finding myself thinking “I really should have done more with it earlier” Doh! I think it’s great how you broke it all down. Thanks!
Thank you, Andrew. It’s never too late to start putting your money to work, obviously. I just wish I had some back in the good old days when double digit gains were the norm!
I know right?! I look at the double digit days and with they would come back, but there must be a big downside to interest rates being so high?
High inflation stinks, and high interest rates make it more expensive to hold debt, but I’ll take high returns every day. We’ve done well since 2009, but it doesn’t look as good if you go back a couple more years.
I learned of the rule of 72 within the last few years, from a blog just like this one. Great info, great breakdown and so informative for all those working towards their goals. It puts a nebulous topic in perspective.
Right on, PadAdventure. Not exactly a great party trick, but it’s a good, easy formula to keep in your back pocket.
I think I only found out about the Rule of 72 when I was in my early 30s. Man, we missed the boat in those great ROI years.
The X factor here is how much money you’re adding every year. I’d like to see some kind of formula that take new money into account. 8 years is a long time to double your investment. 🙂
8 years is a long time, considering you can do it in 8 seconds at the roulette table!
The calculation does get complicated when you start adding additional money each year, and that’s where the online calculators come into play. There are calculators for serial additions for the accumulation phase, and for serial subtractions too, which is helpful in a retirement scenario.
“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”
Indeed. The Rule of 72 works against you if you are among the debtors.