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{Listen to the audio of this section and be sure to review your action items at the bottom of this page}

Have you ever wondered what it will take for your money to double and how long it would take for it to happen in the stock market?

Let me introduce you to the rule of 72.


What is the rule of 72?

The rule of 72 is essentially a rule (or an investing magic trick) that can help you estimate how soon your investment will double based on a fixed annual interest rate. Dividing 72 by the annual interest rate will give you a rough idea of when your investment will be worth twice as much.

- Example:

 
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What else can the rule of 72 do?

Determine the value of the dollar based on inflation

The rule of 72 can be used to calculate how long it will take for your money to lose half it’s value due to inflation by diving 72 by the average inflation rate.
 

Here's how: If we divide 72 by today's inflation rate of ~2.5%, it tells us that if the inflation rate remains consistent, the dollar will lose half it's value in about 36 years. Subsequently, if the inflation rate goes up to 3% and remains consistent, the dollar will lose half it's value in about 24 years.

 

Determine interest payments associated to debt

The rule of 72 can also tell you when the amount you owe in credit card debt will double based on the interest rate you are paying your creditor.
 

Here's how: Let's say you have credit card debt and the interest rate is 20%, dividing 72 by 20% tells us your credit card balance will double in 3.6 years. Yikes! This definitely illustrates the importance of getting laser focused and getting rid of any high interest debt you might have.

 
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Why does the rule of 72 matter to you as an investor?

It matters because it can help you get a sense of how long it will take for your money to grow (or double)  in order for you to meet a financial goal. Knowing how long it will take can help you fine tune your savings and investment amounts in order to meet your financial goals according to a specific timeline.
 


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Try it out in your workbook (located in the main menu) using the following pages: 

  • The rule of 72 calculator
  • The rule of 72 worksheet


Apply the rule of 72 to your current savings account interest rates, your student loans, credit card debt etc - it is certainly a way to get motivated to save more, achieve higher rates of return and to pay off your debt as quickly as possible.