The Rule of 72

Unless you have had a finance class or an accounting class, you might not have heard of the Rule of 72. Why is the Rule important? It’s an easy calculation to see when you can double your money.

Let me explain how it works. You want to know how long it will take you to double your money. You have $1000 to invest. The Rule of 72 tells you that if you divide the rate of growth into 72, you will get your answer. If you are earning 3% on a one-time investment of $1000, you need to divide 72 by 3 to get your answer. In this case, it would be 24 years to double your money. At the end of 24 years, you would have $2000. Keep in mind that you only invested $1000 and did not add anymore money to the investment for the next 24 years.

Also, how fast your money will double has to do with the rate of interest you will earn. The higher the interest rate, the shorter the amount of time you need to double your money. Lets say that instead of earning 3% you actually luck out and get 12%. Then, your money doubles in six years, 72/12=6! Isn’t that great? In 12 years, you double it again, so you have $4000 and in 18 years it doubles again to $8000. If you leave it for 24 years, you’ll have $16,000.

That in a nutshell is the Rule of 72. Check out my post titled, “Can you really get rich quickly? Where I explain compound interest.

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