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# Cracking the Rule of 72

“Money equals freedom” ― Kevin O’Leary # Cracking the Rule of 72

“Money equals freedom” ― Kevin O’Leary

In the world of finance, there are numerous strategies, formulas, and concepts designed to help you achieve your financial goals. Our previous article explained the power of compound interest and the formula for increasing your wealth with ZERO effort. Today, we will take a look into the Rule of 72. Importantly, the Rule of 72 can only be used where you benefit from compound interest, and not when simple interest is used.

The Rule of 72 is a powerful tool that can provide you with invaluable insights into your investments and wealth-building strategies. It is commonly known as a formula used to estimate the number of years required to double your invested money at a given rate of annual return. Of course, nowadays online calculators and spreadsheets can do such calculations for us, and so the Rule of 72 is typically for mental mathematics and can come in handy when you need a quick answer.

## Understanding the Rule of 72

As mentioned, the Rule of 72 is a straightforward mathematical formula used to estimate how long it will take for an investment to double in value at a fixed annual rate of return. This rule is incredibly handy for anyone looking to grow their wealth because it provides a quick and simple way to gauge the potential of an investment or savings plan. To use the Rule of 72, you need to know the annual interest rate or return on your investment.

## The Rule of 72 Formula(s)

There are two main ways to use the formula for the Rule of 72. One works out how many years your money will take to double, and the other tells you what rate of annualised return is required to double your money.

The formula to work out the years it will take to double your money for the Rule of 72 is as follows:

Years To Double = 72 / Annual Rate of Return

For example, if you were to expect a 10% annual rate of return, this would equate to 72 / 10%, resulting in 7.2-years.

In other words, if you want to estimate how long it will take for your money to double at a specific rate of return or interest rate, you can divide 72 by that rate. The result will be the number of years it will take to achieve that doubling of your investment.

The formula to work out what rate of return you would need to double your money in X amount of years for the Rule of 72 is as follows:

Rate of Return = 72 / Years To Double

For example, if you wished to double your money in 10-years, this would equate to 72 / 10, resulting in a 7.2% annual return required.

## The Benefits of the Rule

The Rule of 72’s simplicity is one of its main advantages. It doesn’t require complex calculations, making it accessible to both seasoned investors and beginners. This rule is a quick and effective way to evaluate investments without the need for financial software or extensive calculations.

Additionally, the Rule of 72 underscores the importance of the annual rate of return on your investments. It encourages investors to seek opportunities that offer higher returns and can expedite the growth of their wealth.

## Using it Wisely

Whilst the Rule of 72 is a valuable tool, it’s essential to remember that it provides estimates and approximations. Real-world investments are subject to various factors, including market fluctuations and economic conditions. Therefore, the Rule of 72 should be seen as a simplified guideline, not an exact prediction of your financial future.

To make the most of the Rule of 72, it’s crucial to consider it in the context of your broader financial strategy. You should diversify your investments, remain attentive to market trends, and regularly assess your financial goals.