Everybody likes - or needs - money. Want to double your money? Maybe you think I’m going to tell you which stock to buy, which commodity to purchase, or at least which horse in the race is a sure thing (because I know a guy).
Actually, this is where I show you math. There is math you can do on a calculator (boring!) or…you can do it in your head in seconds with the Rule of 72.
I’m talking about interest rates. Here’s the boring formula for annual compound interest, including principal sum: A = P (1 + r/n) (nt)
A = the future value of the investment/loan, including interest
P = the principal investment amount (the initial deposit or loan amount)
r = the annual interest rate (decimal)
n = the number of times that interest is compounded per year
t = the number of years the money is invested or borrowed for
Whew! That’s an eyeful. Here’s the simple way.
Here’s the magic of the Rule of 72. If you want to know how long it will take to double your money, then simply divide 72 by your annual interest rate. Is your index fund growing at an average of 8 percent? Divide 72 by 8 and the answer is: you will double your money in 9 years.
What if my interest rate is not easily divided into 72? Then just use the magic Rule of 70! If your interest rate is 7%, then you’ll double your money in 10 years.
Let’s say you invested $10,000 and you want to know how long it will take to grow to $40,000 at 6 percent? You want to quadruple your money (i.e., double it twice). A 6 percent growth rate means you double your $10K to $20K in 12 years. Going from $20K to $40K will take another 12 years for a total of 24 years!
Is the Rule of 72 (or 70) just as accurate the traditional formula for annual compound interest? No. But it’s remarkably close. And close is good enough. But isn’t math supposed to be mercilessly exact? Well no.
Author and physicist Brian Clegg in his book “Are Numbers Real?” once defined math as a “set of rules that are used to get from a starting point to an outcome.” In other words, math must first be useful.
I learned about the Rule of 72 in this fantastic little book entitled “What the Numbers Say: A Field Guide to Mastering Our Numerical World.” The authors – Derrick Niederman and David Boyum – wrote the book to combat the growing innumeracy in America. Innumerate is similar to illiterate. Innumeracy is to have poor quantitative thinking. Numbers can intimidate us and even deceive us. But quantitative skill is necessary…and doesn’t have to be scary at all. Like the Rule of 72.
Heath Shive is a freelance writer and former geologist. His articles have won regional and national awards. His favorite hobby is to read any book put in front of him. His second favorite hobby is to write about what he reads.
Hello! My name is Heath Shive, content manager at ScholarFox. I'll be the author of most of the blog posts. I'm a former geologist and currently a freelance writer. The world is complex and seemingly crazy. Good! Because when you love to learn, you'll never be bored.