Never heard of the Rule of 72? Thanks to Einstein, it’s a principle we can use to determine how long it can take to double an investment…or a debt. Here’s what you should know to grow your money better and reduce your debt.
Who wants to buy one car for the price of two? All you have to do is get a loan for six years at a 12% interest rate and pay it off as scheduled. Gross, isn’t it?
Actually, it’s compound interest. It’s bullish if you’re getting it, but a real beast if you’re the one paying it. Most people know about the magic of compounding investments, but it works the other way, too. And just as some rates are better for investments than others, debts should also be avoided with certain interest rates unless you enjoy doubling your debt.
What Is the Rule of 72?
Time isn’t the only factor, but it’s the biggest. The Rule of 72 is Einstein’s simple shortcut to figure out how long it takes for an interest-compounded value to double. It’s not exact, but it’s never more than half a year off. Just divide 72 by your interest rate, and there you have how long it would take for the loan or investment amount to double.
So, 1% would take 72 years to double. 5% takes about 15 years to double. 10% takes 7.2 years to double. 20% takes 3.6 years to double, and 36% doubles in just two years. So, if your loan duration is long, as in home loans, keep in mind it takes even less time for it to re-double (or quadruple). And it’s usually redoubling about half a year quicker for most good credit rates.
The Magic of 12%
As in the example above, if you’re buying a car with a loan (which is typically never more than six years), you want to stay under 12% interest to avoid paying double. And 12% is a magic number, too, being the first to quadruple in almost two years less time than it took to double originally. Therefore, as soon as your interest rate is 12% or higher, your debt is growing at the fastest rate possible.
How To Avoid Doubling Your Debt
Bad credit isn’t entirely hopeless, though. If you find yourself stuck in a position where you cannot get a good rate, you should then shop around for a loan that welcomes early payment. It’s more than avoiding early-payment penalties. The loan should also get recalculated every time you make a payment on the date you made the payment, regardless of due dates.
In other words, you can avoid doubling your debt if you can pay more often. Obviously, paying more than your obligation helps too, but you can effectively cut up to 10 points off your rate just by dividing your monthly obligation into at least bi-weekly, if not weekly, payments. So if you have a $400 monthly obligation, paying $100 every week cuts back on the interest accrual, saving thousands over the course of the loan.
However, that only works if your loan doesn’t have a static monthly payment term. Talk to the underwriter or loan advisor about the terms of your loan. They will be able to tell you whether it is amortized on payment or on a specific date, regardless of when you paid.
By the way, if you can’t get a used car loan under 12%, you should buy new. Legally, new car loans can’t exceed 8%, and you can still get an early-payment loan on that, too.
FAQs
How Do You Calculate the Rule of 72? Here's how the Rule of 72 works. You take the number 72 and divide it by the investment's projected annual return. The result is the number of years, approximately, it'll take for your money to double.
How long will it take to double your money using the Rule of 72? ›
The Rule of 72 is a calculation that estimates the number of years it takes to double your money at a specified rate of return. If, for example, your account earns 4 percent, divide 72 by 4 to get the number of years it will take for your money to double. In this case, 18 years.
What is the Rule of 72 which amount will double faster? ›
The Rule of 72 indicates how fast your money will double at a given rate of return. 2. When you divide 72 by the estimated annual rate of return, you get the number of years it will take for your money to double. So, if you are getting 8% return annually, it would take 72/8 = 9 years to double.
What is the Rule of 72 for dummies? ›
Do you know the Rule of 72? It's an easy way to calculate just how long it's going to take for your money to double. Just take the number 72 and divide it by the interest rate you hope to earn. That number gives you the approximate number of years it will take for your investment to double.
Does the Rule of 72 really work? ›
The Rule of 72 is reasonably accurate for low rates of return. The chart below compares the numbers given by the Rule of 72 and the actual number of years it takes an investment to double. Notice that although it gives an estimate, the Rule of 72 is less precise as rates of return increase.
How to double $2000 dollars in 24 hours? ›
The Best Ways To Double Money In 24 Hours
- Flip Stuff For Profit. ...
- Start A Retail Arbitrage Business. ...
- Invest In Real Estate. ...
- Play Games For Money. ...
- Invest In Dividend Stocks & ETFs. ...
- Use Crypto Interest Accounts. ...
- Start A Side Hustle. ...
- Invest In Your 401(k)
The rule of 8-4-3 when it comes to compounding indicates a style of investment that accelerates growth with time. Initially, a corpus doubles within 8 years through an average annual return of 12% subsequently another doubling happens for the same period after another 4 years following its initial setting up.
What is better than the Rule of 72? ›
Choice of rule
Since daily compounding is close enough to continuous compounding, for most purposes 69, 69.3 or 70 are better than 72 for daily compounding. For lower annual rates than those above, 69.3 would also be more accurate than 72. For higher annual rates, 78 is more accurate.
How to earn 10% interest per month? ›
Here's my list of the 10 best investments for a 10% ROI.
- How to Get 10% Return on Investment: 10 Proven Ways.
- High-End Art (on Masterworks)
- Invest in the Private Credit Market.
- Paying Down High-Interest Loans.
- Stock Market Investing via Index Funds.
- Stock Picking.
- Junk Bonds.
- Buy an Existing Business.
Advantages and Disadvantages of Rule of 72
However, the Rule of 72 is based on a few assumptions that may not always be accurate, such as a constant rate of return and compounding period. It also does not take into account taxes, inflation, and other factors that may impact investment returns.
It's used to calculate the doubling time or growth rate of investment or business metrics. This helps accountants to predict how long it will take for a value to double. The rule of 69 is simple: divide 69 by the growth rate percentage. It will then tell you how many periods it'll take for the value to double.
Does the Rule of 72 apply to debt? ›
Yes, the Rule of 72 can apply to debt, and it can be used to calculate an estimate of how long it would take a debt balance to double if it's not paid down or off.
What is the magic rule of 72? ›
The magic number
The premise of the rule revolves around either dividing 72 by the interest rate your investment will receive, or inversely, dividing the number of years you would like to double your money in by 72 to give you the required rate of return.
How long will it take to increase a $2200 investment to $10,000 if the interest rate is 6.5 percent? ›
Final answer:
It will take approximately 15.27 years to increase the $2,200 investment to $10,000 at an annual interest rate of 6.5%.
How can I double $5000 dollars? ›
To turn $5,000 into more money, explore various investment avenues like the stock market, real estate or a high-yield savings account for lower-risk growth. Investing in a small business or startup could also provide significant returns if the business is successful.
How many years are needed to double a $100 investment using the rule of 72? ›
To find the approximate number of years needed to double an investment, divide 72 by the interest rate. In this case, with an interest rate of 6.25%, divide 72 by 6.25, which is approximately 11.52. Therefore, it would take approximately 11.52 years to double the $100 investment.
How many years does it take to double the rule of 70? ›
The Rule of 70 Formula
Hence, the doubling time is simply 70 divided by the constant annual growth rate. For instance, consider a quantity that grows consistently at 5% annually. According to the Rule of 70, it will take 14 years (70/5) for the quantity to double.
What is the rule of 72 triple money? ›
To calculate how long it takes money to double, divide the interest rate into 72. To see how long money triples, divide it into 115. Assuming a 7% interest rate, it will take approximately 10.3 years for the original principal to double and 16.4 years to triple. There is also a rule of 144.
How long does it take to double money at 2%? ›
Why it Pays to Know the Math
| Rate of Return | Rule of 72 # of Years to Double Money | Logarithmic Formula # of Years to Double Money |
|---|
| 2% | 36.0 | 35.0 |
| 3% | 24.0 | 23.5 |
| 4% | 18.0 | 17.7 |
| 5% | 14.4 | 14.2 |
15 more rowsSep 14, 2023
