Double Your Money Using “Rule of 72″

January 13, 2009 by Tyrone
Filed under: Finance Concepts, Investments

The Rule of 72 is a formula used in finance particularly in investments. This is a general rule that answers the question: ”How many years will it take to double your money?”

You don’t have to make difficult calculations as this rule makes it easy for you to calculate. Depending on the given rate of interest, you can probably evaluate it mentally in your head.

Let’s see the following examples to determine how it works:

In how many years can you double your money given an annual interest rate of 6%?

Using the rule of 72: 72 divided by 6 is 12 years. So approximately, it will take you 12 years to double your money in an investment that gives you an annual return of 6%. This is considering that you don’t withdraw in any given time and allow the power of compound interest to double your money.

Since we already learned about return on investments or ROI, let’s compute the exact number of years using the concept and formula for the future value.

Going back to our example, we use 100,000 as our initial investment. Doubling 100,000 will result to 200,000 as our future value. We need to determine the exact value of n which indicates the number of years for our investment to double.

Using the formula for future value, we have:

FV = PV [(1+i) ^n];

200,000 = 100,000 [(1+0.06)^n] and dividing both sides by 100,000, we have;

2 = [(1+0.06) ^ n] and using the laws of logarithms, we have;

[log 2] / [log (1+0.06)] = [log 2] / [log 1.06] = n

Computing for n will then yield us for 11.89566 years.

Using the rule of 72, it will take you approximately 12 years to double your money. But by using future value and some mathematical computations, it will take you exactly 11.89566 years to double your money. Computing it mathematically, 11.89566 is then equivalent to 11 years 10 months and 22 days.

Note however that the Rule of 72 is not 100% accurate especially in larger interest rates. It is reasonably accurate in the 6% to 12% interest range. Also, the Rule of 72 applies with the assumption that the interest is a fixed annual interest.

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