Use the Rule of 72 to Estimate your Investment Growth
How do you predict how much you could make from an investment? One potential way is to apply the Rule of 72. It’s a quick, useful formula that can estimate the general time it would take to double your money, at a given annual rate of return.
Very conveniently, the number 72 divides cleanly into 1, 2, 3, 4, 6, 8, 9 and 12, allowing for a quick and simple division problem instead of a more complicated compound interest equation.
How to Calculate the Rule of 72
Here’s how it works. Divide “72” by your investment’s projected annual compounded rate of return. The result is the number of years, approximately, it’ll take for your money to double.
For example, if an investment projects to have an 8% annual rate of return, the equation would be 72 / 8 = 9. This means it would take roughly nine years to double your investment. Thus, if you started with a $1,000 investment, in 9 years it will grow to $2,000, then to $4,0000 in another nine years, and so on (assuming the 8% compounded rate of return remains as predicted).
Bottom Line
The rule of 72 is a handy way to estimate how long it will take for an investment to double in value. This equation can help you make important financial decisions, such as when to start saving for retirement or how to invest your money. The rule of 72 is a helpful tool, but it is important to remember that it is only an estimate. Your actual return may be higher or lower than you expect, so it is always a good idea to consult with a financial advisor before making any major decisions.
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Resource:
Investopedia.com
