What’s the Rule of 72 and How Can it Help Me Save?

investing and rule of 72

If you’re looking to get a handle on your personal finances, there are countless schools of thought regarding what you should and should not do. There are tricks for saving, guidelines for boosting your credit score, and tricks and tips for getting the most out of your investments.

When it comes to saving and investing, one popular method you’ve likely heard of is “The Rule of 72.” In a nutshell, the Rule of 72 is a shortcut to estimate the number of years it will take to double your money at a given annual rate of return. Using this rule, you divide the rate, expressed as a percentage, into 72, so:

Years required to double investment = 72 ÷ compound annual interest rate

Note: A compound annual return of percentage should be plugged into the equation as a whole number, not a decimal, to yield an appropriate result (for example, 8 percent is figured into the equation as 8 instead of 0.08, to yield a result of 9 years (vs. 900).

Investopedia does a good job of breaking down this rule:

The Rule of 72 is a useful shortcut since the equations related to compound interest are too complicated for most people to do without a calculator. For example, the equation to determine exactly how long it would take to double an investment that returns 8 percent annually would look like this:

T = ln(2)/ln(1.08)=9.006

With the Rule of 72 in mind, it’s easy to see how investing can be a quicker road to building up your savings than simply putting money into a no-interest or low-interest earning savings account. It’s important to consider the potential fluctuations in the financial market, which can work for or against you depending on market conditions. Still, the Rule of 72 gives you a general average.

The flipside of the rule

It’s important to understand that the Rule of 72 can also be used to calculate the cost of interest on debt. Lenders and financial institutions including banks, credit card companies, and others may essentially use the Rule of 72 in the interest rates they charge you.

For example, if you owed a credit card company $10,000, with an average interest rate of 18 percent, your debt would double to $20,000 in four years. In eight years, your debt would be $40,000.

By understanding how the Rule of 72 works, you should be able to calculate exactly what you’re getting out of your investments, as well as what you’re getting yourself into before you open a new credit card or take out a new loan. It can also help you save by helping you set a goal and have a better understanding about the amount of time and investment it will take to get there.

If you’re looking for assistance in getting on a positive track to financial health or fixing your credit, contact CreditRepair.com. We offer a free personalized credit consultation and a credit score evaluation.

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