The Rule of 72 is a simple equation to help you determine how long an investment will take to double, given a fixed interest rate.
It’s a shortcut that you, as an investor, can use to estimate if an investment will double your money quickly enough to be worth pursuing. When you see how quickly your money can double, you’ll understand the power of compound interest.
Compound interest is what makes you wealthy over time; the longer your money is invested, the more it grows. But, how?
As you earn interest on your initial investment, those earnings are added to the initial amount while earning interest. This produces more earnings, which can then be reinvested as well.
It’s a powerful cycle that can lead to incredible growth. The Rule of 72 paints a picture of how quickly your money can grow without any additional investment on your part.
You don’t need a special ‘Rule of 72’ calculator to figure out this equation — it’s easy.
Simply divide 72 by the fixed annual rate of return and you’ll know how many years it will take for your money to double.
72 / rate of return = # of years
If you’re trying to compute when your money will double at a given interest rate, this formula can be used to determine the interest rate you need your money to double in a set timeframe:
72 / # of years = rate of return
In this vault episode of the InvestED podcast, Phil and Danielle discuss the Rule of 72 more in-depth and explain why it’s critical to understand this rule in order to be a great investor.
Topics discussed in this episode:
- Rule of 72
- Compound interest
- How to pick stocks
- How to double your money
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