The Rule of 72

  When the genius Albert Einstein was asked to name the single best human invention, he thought about it and replied, “Compounding”.

The Rule of 72 tells you how many years it will take for you to double your investment by using a compounded return. Once you understand the basics of compounding returns, it really is quite simple. For example, you are expecting a 10% compounded return. When you divide 72 by your return, the answer will be how many years it will take for your money to be doubled.

Ex. 72 / 10 (%) = 7.2

In this example, it would take 7.2 years for your money to be doubled at the 10% compounded annual return. If a 40 year old man had $50,000, he would be 47.2 years old when his $50,000 became $100,000! Doubled money is good money! Let’s take this example a little further. After another 7.2 years, the same man would be 54.4 years old and his $100,000 would have doubled again to be $200,000. No mere chump change! Now, let’s take a look at why it is so important to earn a modest return over time. If a 30 year old earns 15% rather than 5%, then his money will double every 4.8 years at that same 15%. Now that you know the calculation (72 / 15 = 4.8), you can see that when he is 34.8, 39.6, and then 44.4 years old, and so on, his money is doubling each time. When this same man is 73.2 years old, well passed retirement age, his 15% has turned into a whopping $5.1 million. Now, if he had been earning 5%, he would only have $80,000. There is a definite difference here. It is important that you don’t allow yourself to be content with an inadequate rate of return, especially if the opportunity to earn more is available.