Rule of 72

Every investor and borrow absolutely must know and understand the Rule of 72.

The Rule of 72 is a simple math shortcut that can be used to quickly figure out the amount of time it will take for money to double at a fixed rate of interest. The way it works is easy. All you have to do is divide 72 by your interest rate and the result is the number of years it will take your money to double. For example:

72/1 = 72 years, 72/3 = 24 years, 72/6 = 12 years, 72/9 = 8 years

It is easy to see that you always want your money to grow at a higher interest rate. But the Rule of 72 shows how even just 1%-2% make a huge difference in how quickly that money will grow. Just going from 1% to 3% made the money double 48 years earlier!

So, shopping around for the very best interest rate that you can get for your savings is absolutely worth the time and effort. Simply sticking money is a low rate savings account as your primary savings investment is a dead end. A typical savings account that is paying 1% interest will take 72 years to double. That is not where you need to be!

But, there is more good news about the Rule of 72. It works in the reverse as well to tell you how much a higher interest rate is hurting you when you borrow. To find out how much your debt will double over time you simply divide 72 by the interest rate that you are paying. With the national average interest rate for credit cards in the ballpark of 20% your debt will double every 3.6 years (72/20=3.6). So, again, work just as hard at finding the lowest interest rate you can for your debt as you do for finding the highest interest rate that you can for your savings!

Finally, the Rule of 72 has one more useful feature. It can help you figure out the interest rate that you will need based on the number of years that you have left to save. You simply do this by dividing 72 by the number of years left to save. For example, consider if you are 30 and have $50,000 in savings currently. If you are planning to have $1,000,000 to retire at 65 the interest rate required for you is 2.05% (72/35 = 2.05%). So, the Rule of 72 is a pretty awesome thing to know!

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