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Double Your Money with the Rule of 72: A Powerful Tool for Investment Planning.

Double Your Money with the Rule of 72: A Powerful Tool for Investment Planning.

October 05, 2023

Double Your Money with the Rule of 72: A Powerful Tool for Investment Planning.

Do you know how long it may take for your investments to double in value? The Rule of 72 is a quick way to figure it out.

Are you looking for a simple yet effective way to estimate how long it will take for your investments to double? Look no further than the Rule of 72! This powerful rule can help you make informed decisions about your investment portfolio and plan for your financial future. In this blog post, we will delve into the depths of the Rule of 72, its applications, and how you can use it to your advantage.


Understanding the Rule of 72

The Rule of 72 is a quick and easy method to estimate the time it takes for an investment to double based on a fixed rate of return. It provides a rough approximation and helps investors gauge the potential growth of their investments. The formula is remarkably straightforward:

Formula: Years To Double: 72 / Expected Rate of Return

By dividing the number 72 by the expected rate of return, you can calculate the approximate number of years it will take for your investment to double. For instance, if you anticipate a 6% rate of return, it would take approximately 12 years for your investment to double (72 / 6 = 12).

Example 1: Doubling Your Money

Let’s say you have $10,000 invested in a mutual fund with an expected rate of return of 8% per annum. Using the Rule of 72, you can estimate when your investment will double. Divide 72 by 8, and you find that it would take around 9 years for your $10,000 to grow to $20,000.

Example 2: Determining the Required Rate of Return

Now, let’s reverse the scenario. Suppose you have a financial goal to double your money in 5 years. By dividing 72 by 5, you find that you would need an expected rate of return of approximately 14.4% to achieve this goal.

Example 3: Factoring in Fractional Results

The Rule of 72 is not limited to whole numbers; it can handle fractional results too. For instance, if you want to know how long it would take for an investment to double with an expected rate of return of 5.5%, divide 72 by 5.5. The result is approximately 13.1 years.

Using the Rule of 72 in Your Investment Portfolio

Now that you understand how the Rule of 72 works let’s explore how it can be applied to your investment portfolio. By using this rule, you can assess the potential growth rates of different investments and compare their doubling periods. It allows you to make informed decisions by considering both the time it takes for your money to double and the expected rate of return.

Remember, the Rule of 72 assumes compounding interest over the entire holding period, which means your investments are growing at a compounding rate. This compounding effect can significantly impact the growth of your portfolio over time.

In conclusion, the Rule of 72 is a valuable tool for wealth management and investment planning. It provides a simple yet insightful way to estimate the time required for your investments to double based on a fixed rate of return. By using this rule, you can make informed decisions about your investment portfolio and pave the way towards achieving your financial goals.

 

About the Author:

Damon Paull is a Marine Corps veteran who has traveled to over 20 countries. As a financial advisor in Houston, Texas, he is passionate about helping business owners and individuals pursue their financial goals. You can connect with Damon and his team at: 703.362.5747 or DPaull@totuswm.com.

 


Note: The examples provided in this blog are for illustrative purposes only and do not constitute financial advice. Please consult with a qualified financial advisor before making any investment decisions. All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful.