The Rule of 72
July 24, 2023 Author: Tess Downing, MBA, CFP®, Complete View Financial
When investing and saving for retirement, compound interest is extremely important when determining how much and how often you need to put money away. The Rule of 72 is an easy way to help determine how long it would take to double your investment at a fixed rate of return. This value can help you understand how often and much you need to put away to reach your investment and retirement goals.
What is the Rule of 72?
This formula helps to determine how long it will take for your investment to double when looking at a fixed rate of return.
72 / interest rate = years to double
While this number is a good guide for your investment, understand that it is an estimate. This formula does not guarantee that your investment will double in this amount of time. It is a reference point for you to use when determining how much to invest based on your goals.
Determining Compound Interest
This formula can also be used to determine the amount of compound interest that your investment has earned already. For example, if you invested $100,000 and it took 10 years for that investment to double to $200,000, you can rearrange the formula to determine your average rate of return for those years.
72/10 = 7.2%
With this example, the average rate of return over these 10 years was 7.2%.
Considerations for this Rule
While this rule is a good guide and reference point, you should be aware that it is not a guarantee. It is an estimation for you to use when making investment decisions.
Also, precision is limited with this rule. This rule relies on average, not specific data. Be careful with using this formula for making specific, non-generalized decisions.
This rule does not guarantee financial decisions, it is important to connect with a financial advisor to be fully informed and aware of your options. Work with this trusted professional to help grow your investment abilities, and know that Complete View Financial is here to guide you through the process.