Financial Foundations: Rule Of 72
Hi! I’m Nick, and welcome to Financial Foundations. I’m going to cover several concepts of investing that may seem confusing and show you that they’re actually simpler than you think. Let’s talk about the rule of 72.
So, what is this rule of 72? Well, it’s a simple equation that can be used for two things. One: to determine how long it will take for a given rate of return to double your money. And two: to calculate what rate of return you’ll need to double your money in a certain amount of time. Let’s look at an example to get a better understanding.
So, in order to determine how many years it will take for your money to double, we’re going to need to divide the number 72 by your expected rate of return. So, let’s assume that you expect to earn an average rate of 4% each year. Divide the number 72 by 4 and you get 18! According to this rule, your money should double in 18 years.
Now, let’s say that you want to calculate what rate of return you’ll need in order to see your money double in let’s say, 9 years. You need to divide the number 72 by 9 and you get 8! According to the rule of 72, your money will double in 9 years if you invest it at an 8% rate of return.
There you go, pretty simple! So wait, why is this significant? Well, the rule of 72 is a useful tool you can use when determining where you want to invest your money. In addition to that, if you look at this graph, you’ll see that the rule of 72 highlights the dramatic effect that compounding can have on your money.
There you go! The rule of 72! I’m Nick, and thanks for joining me on Financial Foundations. See you next time!