The Rule of 72
September 15th, 2014

Doubling money depends on 72 / the rate of growth

The Rule of 72 is the very simple method, but sophisticated, that tells you how long it would take your money to get doubled. For instance, if your local bank gives you a solid 3 percent interest in your saving account every year, your deposit amount will double in 24 years without depositing extra money during that period.

To derive that 24 years, you will divide 72 by three, the interest rate in your bank’s saving account. In the real world today, you will never get that 3 percent interest rate in a general saving account thanks to near-zero interest rate set by the Fed Chairman, who controls the key three-month short-term interest rate.

Can it be much shorter years to get your money doubled? Yes, it can, if you invest in the stock markets. For example, if your stock portfolio performs average 12 percent return annually, then your money that is invested will double in next six years, rather than that 24 years. That means your money will get doubled 18 years faster than leaving your money in a saving account.

Or if you get back to the real world, your money will get doubled after 360 years while you leave it in a saving account today (assuming that today’s near-zero interest rate, say 0.2 percent, continues annually but generally interest rates will fluctuate depending of the economy). We do not know how long this near-zero interest rate continues but we know that some countries, like Japan, experienced a decade long deflationary period, which forced the central bank to keep the interest rate at zero for many years.

That being said, it is sometimes risky if you do not invest in the stock markets. The Rule of 72 is another convincing idea that investing in the stock markets is the way to increase your standard of living. 

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