Learn the Rule of 72
Financial planning can be complex, and there are no guarantees that investments will grow in a predictable fashion. That's why some people have a hard time figuring out how much to put into stocks and bonds or what to expect from their investment down the road. However, even in an uncertain environment, there is a simple formula that you can use as a planning guide for growth over time that also factors in compound interest.
One widely used rule of thumb is the "Rule of 72." This simple mathematical formula is nothing new. The first written mention is by Luca Pacioli, a fifteenth-century Italian who mentioned it in his 1494 book Summa de Arithmetica, Geometria, Proportioni et Proportionalita. The formula is a way to estimate how long it will take for an investment to double in value based on its annual rate of return.
This is The Formula:
Years to double your money = 72 ÷ assumed rate of return. For example, let's say you have $10,000 to invest, and you hope to earn 8 percent over time. When you divide 72 by 8, you get 9. You can assume it will take approximately 9 years to grow your $10,000 to $20,000 (assuming you get average returns.)
If your investment is earning an average of 6 percent, you divide 72 by 6 to get 12. At 6 percent interest, it will take 12 years to double your investment.
If you are earning an average of 11 percent, it takes 6.5 years, and so on.
Beware of Average Rates of Return
This formula is a nice planning tool, but no one can promise a predictable rate of return. The denominator in this simple equation represents an assumption that the rate remains the same. In reality, your actual rate of return will probably vary significantly from year to year since markets are unpredictable.
However, over the long term, there are averages that can be used for planning purposes.
Stocks vs. Bonds vs. Money-Market Funds vs. Certificates of Deposit
(based on avg rates over the past 25 years)
US Equities1 | US Fixed Income2 | CDs3 | Money Markets4 |
7.64% | 3.97% | 2.16% | 1.61% |
9 years to double | 18 years to double | 33 years to double | 45 years to double |
Past performance does not guarantee future results. Indices are unmanaged and not available for investment. For illustrative purposes only.
Find Out More
You may want to use the Rule of 72 if you’re trying to decide whether to invest in stocks, bonds, or cash. Your financial professional can help you choose a mix of investments that potentially offer the best chance of pursuing your investment goals. Contact Mark@MirusFinancialPartners.com to find out more.
