Double your Dough: rule of 72
Wondering when you can double your dough? This quick trick makes calculations easy. (Although as my former finance professor would be faster to mention, “Katie, this method is an estimate; it’s not completely accurate.”)
You only need one variable: your compounded rate of return (interest rate in your savings account, for example). Divide 72 by this interest rate, and the resulting number shows how many years it’ll take for you to double your money.
Example:
I have $1000 and want to know when I’ll have $2000 without adding a single cent. My interest rate is 5%. Here we go…
72 / 5 = 14.4 years until my money doubles
And what about inflation my dear friend? Say an average of 2.5% inflation over this period, real return is just 40%, your million dream stays million miles away if you take this path.
February 16th, 2006 | #
Harsha: factors such as inflation? My old finance professor would applaud your notice!
When incorporating inflation, your money will still double at the same rate. However, your money will not be WORTH the same amount. To double the worth of your money, do the following:
initial return - inflation = real rate of return
Ex: my original 5% - 2% inflation = real rate of 3%
Now, use the Rule of 72: 72/3 = 24 years until my money doubles in value
Because of inflation and similar factors, the Rule of 72 can only serve as a general estimate. I think it’s good to start from somewhere when you spot an investment worth considering, and this rule takes only quick math.
February 17th, 2006 | #