What is the Rule of 72?
The Rule of 72 is a simple mathematical formula used to calculate the approximate amount of time it takes for an investment to double in value when compounded annually. It is a useful tool for investors to estimate the rate of return on their investments and to plan for their financial future. The Rule of 72 is based on the concept of compound interest, which is the interest earned on the principal amount plus any interest that has been earned in the past.
How Does the Rule of 72 Work?
The Rule of 72 is based on the concept of compound interest. It states that the amount of time it takes for an investment to double in value when compounded annually is approximately equal to 72 divided by the rate of return. For example, if an investment has a rate of return of 8%, it will take approximately 9 years (72/8) for the investment to double in value.
Benefits of Using the Rule of 72
The Rule of 72 is a simple and effective way to calculate the approximate amount of time it takes for an investment to double in value when compounded annually. It is a useful tool for investors to estimate the rate of return on their investments and to plan for their financial future. Additionally, the Rule of 72 can be used to compare different investments and determine which one will yield the highest return over a given period of time.
More examples of the Rate of Return percentages using the Rule of 72.
2% = 36 years
4% = 18 years
6% = 12 years
8% = 9 years
10% = 7.2 years
12% = 6 years
15% = 4.8 years
18% = 4 years
20% = 3.6 years
Calculating Compound Interest with the Rule of 72
The Rule of 72 is a simple and effective way to calculate the approximate amount of time it takes for an investment to double in value when compounded annually. To calculate compound interest with the Rule of 72, simply divide 72 by the rate of return. For example, if an investment has a rate of return of 8%, it will take approximately 9 years (72/8) for the investment to double in value. Additionally, the Rule of 72 can be used to compare different investments and determine which one will yield the highest return over a given period of time.
Personally with a long term portfolio that I self managed long term I make it my goal to get 12-15% return on investment. I think this is very doable if you pay attention to the markets and make adjustments to your portfolio. This is also something that I think you get better with time. So don’t focus so much on timing the market but using a DCA strategy and time in the market is knowledge.
Disadvantages of using the Rule of 72
One of the biggest disadvantages of the rule of 72 is that it doesn’t take into consideration taxes or for example dividends. If you’re like me and are building a heavy dividend paying portfolio the compounding effect is amplified by reinvesting your dividends. And because of this your rate of return is actually better than the performance of the stock or fund you’ve invested in.
