Today’s post is brought to you by the number 72! No really, it is. Because 72 is an awesomely useful number in the world of personal finance. It can be used to figure out when (approximately) your investment in something will double.
It’s super easy. Let’s say you’ve got your money in a stock that grows by 6% each year, on average. Without buying any more of that stock, when will your money double through compounding alone?
Just divide magic number 72 by the interest rate (6%), and BOOM, you’ve got your answer! 72/6 = 12. In 12 years, your investment will double. So if you own $1000 worth of that stock right now, and it grows at 6% per year, it will be worth $2000 in about 12 years.
Of course, the “Rule of 72,” as this is called, doesn’t always work perfectly. You can really start to see it fall apart as you try to use higher interest rates. For example, 100% interest should double every year, but using the rule of 72, you’d get about 9 months. Hmm, that’s not right! But for most realistic percentages, it works out pretty well. (Because you’re not really going to find an investment that returns 100% per year, year after year, anyway. Sorry!)
The Rule of 72 can also be used to do a back-of-napkin calculation regarding inflation. As long as you can remember the Rule of 72, and the fact that inflation averages about 3.5% per year in America, you can figure out when the price of something is likely to double. 72/3.5 = ~20, so in 20 years you’ll be paying twice as much for a gallon of milk!
Play with it, have some fun! And remember, your money will double every x years, not just once. So going back to that $1000 at 6% example, not only will it be $2000 in 12 years, but it will be $4000 12 years after that, and $8000 12 years after that…
The Rule of 72 doesn’t allow for an easy calculation of it, but now imagine how your money would grow if you were investing $1000 each year, instead of just once. Ooo… I just got goosebumps!