What is Rule 72?

 

Investors can use it to find out when their investments will double

Rule 72 is an easy way for an investor or advisor to calculate how long an investment will double, based on a fixed annual rate of return. Simply divide 72 by a fixed rate of return, and you’ll get a rough estimate of how long it will take for your portfolio to double.

However, the science is not accurate, and you may want to use a different formula to explain rates of return that are outside a certain range.

Main Intake

Rule 72 is a simple method of calculating how long an investment will double, based on the annual rate of return.

Investors can use those rules when planning for retirement, education expenses, or other long -term financial goals.

To be more precise, investors can use a logarithmic formula to calculate the investment time multiplied.

In some cases, investors may want to use Rule 70 instead.

What is Rule 72?

Rule 72 is a practical rule that investors can use to estimate how long an investment will double, assuming a fixed annual rate of return and no additional contributions.

If you want to dive deeper, you can use Rule 115 to determine how long it will take to double your investment.

Both of these rules can help investors understand the strength of compound interest. The higher the rate of return, the shorter the amount of time it takes to double or double the investment.

How to Use Rule 72 to Estimate Returns

Let’s say you have an investment balance of $ 100,000, and you want to know how long it takes to get it up to $ 200,000 without adding more funds. With an estimated annual return of 7%, you would divide 72 by 7 to see that your investment would double every 10.29 years.

Here are examples of other rates of return and how Rule 72 affects your investment:

Twice Required Annual Rate of Return

1% 72

2% 36

3% 24

4% 18

5% 14.4

6% 12

7% 10.3

8% 9

9% 8

10% 7.2

11% 6.5

12% 6

However, this simple calculation is not easy to make. If you have a little more time and want a more accurate result, you can use the following logarithmic formula: 1

T = ln (2) / ln (1 + r)

In this equation, “T” is the time for a multiplier investment, “ln” is the natural log function, and “r” is the compounded interest rate.

So, to use this formula for the $ 100,000 investment mentioned above, with a 6%rate of return, you can determine that your money will double in 11.9 years, which is almost the 12 years you would get if you just divide 72 by 6 .

Here is what the logarithmic formula looks like in this case:

T = ln (2) / ln (1 + .06)

If you don’t have a scientific calculator, you can usually use the one on your smartphone for advanced functions. However, basic calculations can give you a good idea if that’s what you need.

How to Use Rule 72 to Estimate Compound Interest

Like most equations, you can move variables to solve other uncertain problems. If you look back at an investment you’ve held for several years and want to know how much the annual compound interest return is, you can divide 72 by the number of years it takes for your investment to double.

For example, if you start with $ 100,000 and eight years later the balance is $ 200,000, divide 72 by 8 to get a 9%annual rate of return.

Salt Seeds

Rule 72 is easy to calculate, but not always the right approach. For starters, it requires a fixed rate of return, and while investors can use the average stock market return or other benchmark, past performance does not guarantee future results. Therefore, it is important to do research on the expected rate of return and be conservative with your estimates.

Also, a simpler formula works best for rates of return between 6% and 10%. Rule 72 is not very accurate with rates on either side of the range

For example, with a 9%rate of return, a simple calculation returns twice the time from eight years. If you use the logarithmic formula, the answer is 8.04 years - a difference that cannot be ignored.

On the other hand, if you have a 2%rate of return, your Rule 72 calculation returns the time to double that of 36 years. But if you use numbers using a logarithmic formula, you get 35 years - a year -round difference.

As a result, if you want to get a quick idea of ​​how long your investment will double, use a basic formula. But if you’re calculating those numbers as part of your retirement or education savings plan, consider using logarithmic equations to make sure that your assumptions are as accurate as possible.

Rule 72 works best in the long run. If you’re about to retire, it may not be that helpful because short -term fluctuations can give your annual rate of return less time to get out.

Rule 72 vs. 70

Rule 72 gives a fairly accurate estimate if the rate of return you expect is between 6% and 10%. But if you see lower rates, you might consider using Rule 70 instead.

For example, take the example of the previous 2% return. With a simple Rule 70 calculation, the time to multiply the investment is 35 years - exactly equal to the result of the logarithmic equation.

However, if you try to use it with a 10%return, the simple formula gives you seven years while the logarithmic function returns about 7.3 years, which has a wider difference.

Like any method of practice, Rules 72 and 70 are imperfect. But they can give you valuable information to help you with your long -term savings plan. Throughout this process, consider working with a financial advisor who can help you tailor your investment strategy to your circumstances.