Rule of 72

This will be a shorter post and extremely basic for any experienced investor. The Rule of 72 helps you estimate how many years it takes to double your money, based on an average annual rate of return. This is a quick, simplified way to account for compound interest. It assumes you reinvest all of your returns. So let’s see some equations:

Years to double investment = 72 ÷ annual rate of return

OR

Required rate of return = 72 ÷ years to double investment

So let’s say you buy $10,000 of VTSAX and you’re wondering how long it’ll take to turn that into $20,000. Over the last 10 years, it’s average annual return has been about 8% (you can explore longer horizons if you want more long-term confidence). So, 72÷8 = 9. At 8% annual returns, it takes 9 years for $10k to grow to $20k. Let that $20k sit there for another 9 years, and it becomes $40k, and so on… Obviously, your returns will fluctuate from year to year. One year may lose 10% and the next may gain 20% (average annual return would be +5% for those 2 years). Invested heavily in a bond fund like VFICX? This historically returns 5%, so it’ll take about 14.5 years to double your money. If you’re the guy that just puts everything into a savings account, 1.2% is about the best you can find right now. This rate doubles your money every 60 years!

A few things should jump off the page when seeing these numbers:

  1. Invest Early: If your money is doubling in value every 9 years, investing from age 34 to 70 will give you 4 doubling events (at ages 43, 52, 61, and 70). So $10k at age 34 would be $160,000 at age 70 ($10,000 x 2 x 2 x 2 x 2 = $160,000). If you can manage to get in one more doubling event (start at age 25), $10,000 would turn into $320,000 by age 70.
  2. Increase Your Returns: 8% is a very reachable rate of return. If you can manage to get 10% returns (my absolute minimum threshold for real estate investment), your money doubles every 7.2 years, which adds 1 more doubling event for the 34 year old in the scenario above. If money sits in a savings account, it probably won’t double more than once in a lifetime.
  3. Invest Often: If you don’t get started early, you can at least invest often. The numbers above show what happens if you put $10,000 in and NEVER put in more money again. However, if you start investing $400/month at age 34, and get 8% annual return, you’ll retire with about $1,000,000 at age 70.

There’s some complicated math that supports this extremely simple formula. If you want to nerd out on it more see Investopedia or Wikipedia. If you want to estimate your balance growth over time, check out Dave Ramsey’s calculator.

One thought on “Rule of 72

  1. Pingback: The Simple Path to Wealth review | Salary Optional

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