You may have heard investors talk about “the rule of 72.” It sounds mysterious, but it’s really just a simple mathematical equation that can help you calculate returns by estimating how many years it will take for you to double your money at a given annual rate of return.
Let’s say you’re earning 6 percent. Divide 72 by 6, and you get 12. If your rate of return stays at 6 percent, it should take 12 years to double your money. You can also use the rule of 72 another way: say you want to double your money in ten years. Simply divide 72 by 10, which equals 7.2. You’d need to make 7.2 percent a year in order to double your money in ten years.
Since there’s a lot of marketing sizzle that comes with doubling your money, you may hear promises like “your money doubled in ten years - guaranteed!” You can use the rule of 72 to see what’s really going on beneath the hype. Is the financial product really offering 7.2 percent guaranteed for ten years? And if they are, is there a catch? Can you withdraw your money when you need it? What happens to it after ten years?
The rule of 72 may be simple, but it can help you avoid buying gimmicky financial products, or ones that are more complicated than they seem at first glance and don’t suit your financial goals. It can also help you plan your retirement by estimating your returns.