Not sure if you’re on track to become wealthy? The Rule of 72 can help!
The Rule of 72 is a simple mental math shortcut that estimates how long it could take your money to double. This is what it looks like…
72 ÷ interest rate = years to double
It’s simple, it’s easy, and it might change your life.
Let’s say you’re done living paycheck-to-paycheck and you’re ready to build wealth. You’ve downloaded a budgeting app, and you’ve set aside $150 each month to save. Look at you! That’s a massive step towards building wealth.
But now you face a dilemma—where should you stash that money each month?
Your checking account? A savings account? Retirement accounts? NFTs? Each person you ask has a different opinion, fully backed with anecdotal evidence.
But have no fear! Enter the Rule of 72. It’s your gleaming sword that can slash through false perceptions and help you conquer your savings goals.
Let’s say for the time being, you’ve kept some money in a “high-interest” savings account earning .5%. How quickly will that account double your money?
Simple—plug that interest rate into the Rule of 72, and you get…
72 ÷ .5 = 144 years to double…
That’s right—your money will take 144 years to double with your current savings strategy. Yikes! That’s enough time to move from steam power to SpaceX.
But that’s not all—that interest rate leaves you helpless to inflation, which as of the writing of this article is about 3.25%.1 Luckily, you can use the Rule of 72 to discover when inflation will double the cost of living. Just replace the interest rate with the rate of inflation, and you get…
72 ÷ 3.25 = 22 years
Think of it like this—in 144 years, your money would double once. But the cost of living would double 6 times. Without the Rule of 72 to reveal this truth, your savings strategy might erode your wealth instead of increasing it!
But suppose you found an account with a 6% interest rate. Plug that into the Rule of 72, and you get a very different result…
72 ÷ 6 = 12 years
Over a 45 year career, your money would double roughly 3 times. The cost of living would only double twice. So your wealth would be above the rising tide of inflation.
The Rule of 72 isn’t a guarantee of success. After all, past performance can never guarantee future results. But the Rule of 72 can estimate if your savings are on track to become wealth, or if you’re heading towards financial disaster. Use it often, and discuss your findings with a financial professional.
¹ “United States Inflation Rate: Stats,” Trading Economics, https://tradingeconomics.com/united-states/inflation-cpi#:~:text=Inflation%20Rate%20in%20the%20United,percent%20in%20June%20of%201921.
Divide 72 by an annual rate of return to calculate approximately how many years it takes for money to double. Understand that most investments generate fluctuating returns, so the period in which an investment can double cannot be determined with certainty. Keep in mind that this is just a mathematical concept. The hypothetical examples do not reflect any taxes, expenses, or fees associated with any specific investment. If these costs were reflected the amounts shown would be lower and thetime to double would be longer. Investing involves risk including the potential loss of principal.