The Rule of 72
One of the most useful ‘math tricks’ in my financial planner’s tool belt is the Rule of 72. This Rule helps you figure out what it will take to double your
money. The trick works backwards and forwards, i.e. if you know the potential rate of return, you can figure out how long it will take to double your money if this rate of return were to continue – or – if you know how long a period you have, you can figure out the consistent rate of return that is needed to double your money during that given period.
Let’s look at some examples. You have $150,000 and you want to double your money in the next 10 years. Take the magic number 72 and divide by 10 to find that the rate of return you will need to reach your goal is 7.2% per year. What if you wanted to double your money is 6 years? 72 divide 6 tells you that a 12% per year rate of return would be required.
If you know your annual rate of return ahead of time, say 3%, you can divide 72 by 3 to determine that it will take you 24 years to double your money. Conversely, with a whopping 24% annual rate of return it would only take you 3 years!
You now have an easy way to do projections in your head. Try it sometime and amaze your friends and family!