Cool Rule Of 72

The Cool Rule of 72


Comments

Your trusty Herald Square #2 pencil is busted and your smartphone’s battery has died.  You need to find out approximately how long it will take for an investment to double in value.  What do you do???   Use your brain and the “Rule of 72”.

Divide 72 by the compounding interest percentage you are getting on that investment.  My free brokerage account shows that my stocks have gone up 12% in the past year.  Not too shabby!  72 divided by 12 tells me at this rate it will take 6 years for the portfolio to double.

This is a ballpark figure, but very close. Therefore, it is close enough to use when hanging with the big boys if they start talking all highfalutin Wall Street chitter-chatter.              

So $1,000 will be worth $2,000 after six years.  If I let it ride and get the same return, that $1,000 will be worth $64,000 after 36 years!  My cash would not fare as well over 36 years.  I am getting about 2% on that right now.  If that rate stays the same, it will take 72/2 = 36 years to double.

As you can see, the Rule of 72 is darn close.  It’s also easily divisible by 1, 2, 3, 4, 6, 8, 9, and almost easily divisible by 5,7 and 10.

Post a comment via FaceBook

Post a comment on this Website

  1. The Hoov
    The Hoov05-01-2012

    Thanks Chip. Very helpful. Need to pay a visit to ye ol’ portfolio and see what the hell is going on.

    Any stock tips?

  2. Chip
    Chip05-01-2012

    I’m not much of a gambler. I have some individual Blue Chip stocks as well as a fund with the same mix as the S&P 500.

  3. Al
    Al05-01-2012

    Using 70 is actually closer, but is not as easy to be divided by 3,4,6 etc..

    this number actually comes from the equation for compound interest

    If you want to get into the math:
    P=ce^(rt)

    if we are looking to double it becomes 2=e^(rt)

    where solving for t=ln(2)/r

    which is approximately = .7/r or in terms of percent
    100*.7/r = 70/r

  4. Chip
    Chip05-01-2012

    Al, you are correct that 70 can be more accurate at times. 70 is slightly more accurate for lower percentage returns. At 5%, using 72 or 70 is a wash. Then 72 is better from 6%-12%. For ease of calculating in one’s noggin, I like the Rule of 72.

Leave a Reply

Spam control * Time limit is exhausted. Please reload CAPTCHA.