The Rule of 72

The rule of 72 is a great estimation tool to replace a Future Value formula in finance. It is a relatively easy calculation, doable in your head with a grade 5 math level. The rule of 72 is simply a calculation of how long it will take to “double your money” using a specified rate of return. You take the rate of return and divide it by 72 giving you the appropriate amount of years needed for a double.

72 / 10% return = 7.2 years to double.

The formula can also be used inversely to calculate a reduction of half the capital using the inflation rate divided by 72.

72 / 2.5 = 28.8 years to have your capital halved

Inflation is often overlooked but should not be as it is an invisible tax and a consequence of investing too conservatively, (i.e T-Bills, Money Market)

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s