You may or may not have heard of the Rule of 72. Regardless, the Rule of 72 is a nifty financial tool that anyone can use to very easily calculate the amount of time it takes to double your money using a given return. And when I say easily, I mean it couldn’t be more simple. Even people who hate math (my wife and my mom) love the Rule of 72. Let’s jump right into an example.
First of all, part of the ease of the Rule is the fact it uses whole numbers only. No decimals or any other funny stuff applies. Take the number 72 and divide it by an annual rate of return, again in whole numbers. So if you use the average annual return of the stock market over the last 100 years, or 10%, we divide 72 by 10. The result is, of course, 7.2. So if you invest your money in all stocks, you should, on average, double your money every 7 years or so. What if your stock portfolio only earns 8% per year on average? Well, 72 divided by 8 (not .08 as we’re using whole numbers only) is 9. So if your rate of return in stocks is only 8%, expect to double your money about every 9 years.
What if you’re lucky enough to earn a 12% annual return on your stock portfolio? Do it with me here – 72 divided by 12 is 6. So if your presumably tech-heavy stock portfolio earns 12% per year on average, you’ll double your money about every 6 years! How easy is that?
Let’s use a real-world example to show how you can use the Rule of 72 in a financial situation in your life. Suppose you have a newborn granddaughter for whom you’d like to set up a college education fund. If you expect her college education potentially to cost around $100,000, how much money would you need to invest to cover the entire cost? The answer? About $20,000 or $25,000 assuming you or your advisor invests the money in stocks. Why $20,000 or $25,000? Well, we know you can expect to double your money about every 9 years if your annual rate of return is 8%. So if your newborn granddaughter goes to college at age 18 or 19, your money should double twice! So $25,000 will double to $50,000 in about 9 years. And once there, you can expect your $50,000 to double to $100,000 in another 9 years, or about the time she’ll be headed to college. See! You’re a math wizard!
So if you’re adept at doing math in your head, great! If not, use the four-function calculator on your phone to use the Rule of 72 to quickly and easily determine what amount of time it’ll take you to double your money given a certain annual rate of return! Now you know about the Rule of 72!
DISCLOSURE: Pacific Northwest Asset Management, LLC (hereinafter “PNW Asset Management”) is an investment adviser registered with Washington State. PNW Asset Management may not transact business in states where it is not appropriately registered, excluded or exempt from registration. Individualized responses to persons that involve either the effecting of transactions in securities, or the rendering of personalized investment advice for compensation, will not be made without registration or exemption.