Before we get to the rule of 72….If you’re a creative person and you are working hard at your craft and your career, you probably just want to create and not mess with a lot of the other day to day life tasks. But it is important to keep an eye on those day to day tasks, including your money and your financial future. Please take a couple of minutes to read about the rule of 72 below, it is simple, easy, and fast, and it can help you when you take a break from your work to think about finances in your later years…
Have you heard of the rule of 72?
The rule of 72 is a simple formula to quickly find out how many years it will take for a lump some of money to double in value. This easy formula is simple and it works. For you to figure out how long it might take for your lump some of pirate treasure to double in value, you don’t need a college degree in finance, you don’t need an IBM super computer, and you don’t need a quad shot extra large espresso grande’ with scotch mixed in. All you need is to know the rule of 72, and a calculator. If your good with numbers, you could even do the math in your head. Once you know the rule of 72, you will know how long it will take your lump some to double, and then double again, and so on.
The Rule of 72 – A Quick example
Here’s a quick example: Let’s say you have a lump some of $5000 earning 3% interest annually. To quickly figure out how many years it will take for that $5000 to become $10,000, simply divide 3, (your rate of return in the above example) into the number 72.
The answer is 24. (72 ÷ 3 = 24). It would take 24 years for that $5000 to grow to $10,000. That’s a long time. What if you were getting 6% on your money? Just divide 6 in to 72 and you get 12 (72÷6 = 12). By doubling your rate of return, you cut the time for your money to double in half.
This simple rule of 72 is good because it is so simple, it’s quick, and it works. It’s a good thing every so often to run the numbers and get an idea of how fast or how slow your money is growing. And you want that money to grow, right? Obviously, the greater your annual rate of return, the faster your lump some will grow. At the time of this writing, even getting 3% in a CD or savings account is a challenge. To get a greater rate of return in the current economy, you have to take on more risk. For now, we will just focus on the rule of 72.
The rule of 72 is just used for figuring out how many years it will take for a lump some of money to double in value. It does not take into account that you might add more money to your lump some. Of course your money would grow much faster if you were able to add to the lump some.
Review the Rule of 72
Let’s review the rule of 72. You have a lump sum of money. You take the annual rate of return you are receiving on that money, and divide it into the number 72. The answer you get is the amount of years that it will take your lump some to double in value. (Example: Your getting 5% on $5000 at the moment. 72÷5 = 14.4. So your $5000 becomes $10,000 in approx. 14.4 years if you add no money to it, and your rate of return is constant.
72 (the rule) ÷ (rate of return) = (years for lump sum to double).
Parting Shot: Use the rule of 72 as a guide, not as your whole financial plan. With interest rates so low at the moment, it’s going to take forever for money in a savings account or CD to double. At some point interest rates will rise, and so will your rate of return. Now focus on Compound Interest…
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