How Understanding the ‘Rule of 72’ Helps You Make Personal Finance Decisions

Though everybody wants their money to grow, few people understand the best way to make that happen.

 

It’s all about where you choose to put your money and the rate of growth you’re able to achieve over a period of time. When you’re trying to figure out how compound interest works, the “rule of 72” is one of the most helpful tools available.

 

What is the Rule of 72?

 

The Rule of 72 is a helpful, easy-to-understand formula that predicts how many years it takes money to double based on a specific rate of return.

 

You can use it to make decisions about where to put your money based on how much time you have for it to grow and what your risk tolerance is. If your goal is to have twice as much when you finish as when you start, you can identify the interest rate you need based on how much time you have.

 

All you need is the interest rate to complete the calculation, which is based on the following formula:

 

72 / interest rate = years to double

 

With this simple calculation, you can look at the interest rate offered by various savings tools or anticipated growth of investments and see exactly how long it will take for your money to double.

 

Here’s how different rates of interest impact the time needed to double:

 

At 1%, it will take 72 years for your money to double (72 / 1 = 72)

 

At 3%, it will take 24 years for your money to double (72 / 3 = 24)

 

At 6%, it will take 12 years for your money to double (72 / 6 = 12)

 

At 9%, it will take 8 years for your money to double (72 / 9 = 8)

 

At 12%, it will take 6 years for your money to double (72 / 12 = 6)

 

This list provides as clear a picture as anybody could possibly need of the difference between parking your money in a super-safe, standard savings account that pays 0.09%, and investing in a riskier investment such as the stock market, where the average annualized total return for the S&P 500 index has been just shy of 10% over the last 90 years.

 

It’s a 790-year difference when it comes to doubling!

 

The same formula can be very useful when it comes to taking out loans. Whether you are looking for a new car, a mortgage for a home purchase, or paying interest on your credit card, if you divide 72 by your interest rate, you’ll see exactly how fast the lender (or credit card company) is doubling the money that you’re paying them.

 

It’s a helpful guide to steering clear of usury rates by loan shopping and understanding the advantages of refinancing.

 

As straightforward as the Rule of 72 is, getting your personal finances in order can be a complicated task.

 

Click here if you would like to schedule a time to Chat.
 
Scroll down to subscribe to our blogs and have them sent directly to your inbox once a month!

Share this article

Stay up-to-date on our latest articles.

SUBSCRIBE

Ready To Take The Next Step In Your Firm’s Financial Growth?

Unlike other CPAs, we work ONLY with law firms. This means we know your specific challenges and exactly how to solve them.

Visit our services page or contact me to set up a free discovery call and learn more about how we can best meet your needs.

Services

Silver Peaks Accounting Services offers a range of personalized accounting and financial planning services to meet the unique needs of your business.

About

We help law firm owners gain financial clarity, develop their firm vision and design a strategy to catapult performance.

Work With Us

You can set up a free discovery call where we’ll discuss the needs of your business, and how we can best partner with you. 

Privacy Policy | Terms & Conditions

Copyright © 2020 – 2022 Silver Peaks Accounting Services, LLC – All Rights Reserved.
Colorado CPA Firm License No: FRM.5000507 | Supervised by Jessica Gonifas, CPA License No: CPA.0024071