The Rule of 72

The Rule of 72 explains the miracle of compounding interest.

It is alleged that Albert Einstein referred to compound interest as the “most powerful force in the universe” or the “greatest mathematical discovery.” However, no proof can be found that Einstein ever mentioned the Rule of 72, much less invented it. In fact, the Rule of 72 was first cited nearly four-hundred years before Einstein’s birth, by Italian friar Luca Pacioli, in his 1494 book “Summa de arithmetica geometria, proporzioni et proporzionalita” a guide to arithmetic, algebra, geometry, accounting, weights, and measures. Not a great bedtime book…

How Long Does it Take to Double Your Money?

Please watch the video above if you’d like a simple explanation and how you can apply it to your investment strategy. In a nut shell, the Rule of 72 is a simple concept that enables you to do some quick calculations on the fly to estimate future investment earnings. By definition, the Rule of 72 helps you determine how long it will take to double your money if you assume a specific rate of return on your investment. Simply divide 72 by the interest rate, and the answer is the number of years it will take your money to double. At 8%, it will take nine years to double your money. At 10% it’s 7.2 years.

You can also use this rule to help figure out what rate of return you would essentially need to earn to double your money within a specific time frame. For example, if your future financial life goals require you to double your money in 10 years, just divide 72 by 10 to find that you must earn 7.2% to reach your goal.  Good stuff!