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What is the Rule of 72?

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Q. Someone mentioned the Rule of 72. What does it mean?

Josie’s answer - I love the rule of 72 which is a very handy to remember.

It is known as the rule of 72 because it can give you a quick answer as to how quickly your investment can grow by re-investing your investment’s earnings. It tells you how many years (give or take a month) it will take to double your money at a given rate of return.

You need to start with the number ‘72’. You then determine what rate of return you expect to get on your investment. By dividing this return into 72 you will know for how many years you need to invest to double your money.

For example, if you expect to receive a return of 10 per cent a year, then you divide 10 into 72, which gives you 7.2 years.

In other words, you can double your money in just over seven years when you re-invest your earnings and your investment earns 10 per cent a year (make sure you use an after tax figure!).

If your return was 2%pa (which is what some bank accounts are paying), it will take 36 years for you to double your money. When you work out the numbers, keeping most of your money in a no-interest or low-interest bank account just doesn’t make “real” sense.

Remember apathy is your biggest expense, so make sure you track your savings and investments.

Don’t forget that the above information is general in nature and not specific to your goals and objectives. It is recommended that you seek personal financial advice specific to your needs.

 

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