The Lazy Man and Money blog recently ran a series of posts titled Compound Interest Week complete with a chart to compute the length of time it takes for your money to double at a specific interest rate. I'll take his word that his chart is correct, because my easy rule of thumb comes close to the same values. I wish I was smart enough to have thought of this rule, but I can not take credit for it. In fact, it is in every business textbook I have taught from!
The rule is simple and is known at the Rule of 72. To use it, simply take an interest rate and divide it into 72. The result is the number of years it will take for your money to double. For example, you have $25,000 in your 401(k) and you plan on retiring in 32 years. If you can average 9% returns (remember the problems with using averages), 72 divided by 9 is 8 so your money will double every 8 years. Eight goes into 32 four times so your money will double four times. That is, $25,000 doubled is $50,000, which doubled is $100,000, which doubled is $200,000. Pretty easy to do in your head too!
All Financial Matters puts an interesting twist on the Rule of 72 by introducing the Rule of 114 (time for your money to triple) and the Rule of 144 (time for your money to quadruple).
With a little imagination, you can find all kinds of uses for the Rule of 72. Divide 72 by your estimated rate of inflation and it will tell you how many years it will take for your purchasing power to be cut in half. How many ways will you use this rule of thumb?
Before I get your comments about the inaccuracy of the rule, it is close enough. Keep in mind that we are usually estimating our rate of return and chances are our actual experience will be different anyway.
Photo on Flickr by PetroleumJelliffe
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