Rule of 72- Doubling Your Money with Math

I’ve talked about the Rule of 72 before, but I’ve never devoted an entire article to it. If you’re unfamiliar, or even if you’re not, I guess, the Rule of 72 is a calculation to quickly see how many years it will take for your money to double at a given annual rate of return.

Wait, this is fun. Don’t go away.

72 divided by annual return = years to double your money

As an example: If the annual rate of return is 7.2% it will take 10 years for your money to double. See? Fun.

72/7.2% = 10 years.

If you have an annual rate of return of 2% it will take thirty-six years for your money to double. 72/2%=36 years. Everyone on board?

Here’s a fun calculator from Money Chimp you can use to play around with the numbers yourself. Don’t do that yet, though. You’ll get distracted and not spend enough time looking at the nice pictures I drew.

Why is the Rule of 72 Important?

The Rule of 72 is important because it helps you loosely plan out your projected future net worth. We can’t know what the market will do in the future, but we can make educated guesses. Doing some quick calculations based on those guesses is just good clean fun.

Let’s look at some pictures to help illustrate the point:

So, let’s say right now you’re a handsome thirty-three-year-old couple and have $200,000 saved up. You want to know how you’re looking as far as retirement goes. For this experiment we’ll say the market returns an average of 8% per year. If you just stopped adding any more money to your retirement account, how much money would you have once you reach your sixties?

So here you are on your ship of savings with your cute little family and pile of investment money.

We’re curious to see how much that nest egg will turn into, so we head to Rule of 72 Island, because that’s where the Rule of 72 vault is located, obviously.

Eventually, we make it. Here we are. We throw our golden bag of money off the ship and onto the island.

Like so.

Next we take that $200,000 and drag it into the Rule of 72 vault to see how it does.

“It’s very hard dragging a pile of money but it’s good team building.” – Mr. Burrito Bowl

Very nice. Next, we just run the numbers. Remember, we’re assuming an 8% rate of return on our investment, which would mean our money would double every nine years.

At this point you’re probably thinking all these drawings are superfluous and we just needed a calculator. That is true.

Anyway.

In nine years we come back to the island to see how our vault of money is doing. Our money doubled from $200,000 to $400,000 without any of us doing anything except having another baby and being stick figures. Nine years after that, in 2037, our money will have doubled again. But, because of the magic of compounding interest, it didn’t double from $200,000, it doubled from $400,000. So, now in our early-fifties, we’d have $800,000 saved up for retirement.

See how excited we all are about that? Then we leave for another nine years and continue being adults who have lives.

We come back again when we’re sixty years old. At that point we’d be close to standard retirement age.  Our kids would be grown and have kids of their own, and they’ll be working on their own Rule of 72 vault.

By this time we’re no longer excited about the amount of money we have. We’re just not worried about money at all. Money doesn’t bring happiness, it just takes away the pain and stress of not having it. Once we reach the point where money is no longer an issue we just won’t think about it that much.

These aren’t our actual numbers, but it serves the purpose for planning. You can experiment with different rates of return to see what the net worth of future you might be.

Why bother doing this exercise?

It’s important to do this exercise to get a realistic expectation of what you’ll have in retirement. If you plan ahead you won’t have to worry about money much at all during the back nine of your life. If you don’t plan ahead, you might wander up to the island for the first time only to realize your Rule of 72 vault is empty. Yikes.

This also serves to illustrate how important it is to get started investing early.

So the Rule of 72 is a fun mathematical tool to help you make some basic assumptions about how your money will grow. It’s not an exact predictor of future net worth because we don’t know what future rates of return will be. But, it is an easy formula to help you quickly see where you’ll be depending on market returns and whether or not you keep contributing.

A quick fairly conservative back of the envelope way to figure out future net worth is to assume it will double every ten years. This isn’t exact, obviously, but it will get you in the ballpark.

Most importantly:

If you don’t have anything invested then your money will never double. Guitars, cars, and movie posters of Stellan Skarsgård don’t double, no matter what the rate of return is in the stock market.

 

So, save your money and invest in future you.

Thanks for reading! Feel free to share this if you want. Sharing is caring.

Also, read some of these other articles to get the image of a naked Stellan Skarsgård out of your mind.

On Swearing (Warning Explicit Content)

The Fast Forward Life- Skipping Work and Getting Paid

The Burrito Bowl Diaries Philosophy on Money and Investing