Will Your Savings Become Wealth? | HowMoneyWorks
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# The Knowledge Gap

May 4, 2023
Rule of 72
Inflation

### Not sure if youâ€™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 likeâ€¦

##### 72 Ă· interest rate = years to double

Itâ€™s simple, itâ€™s easy, and it might change your life.

##### Hereâ€™s howâ€¦

Letâ€™s say youâ€™re done living paycheck-to-paycheck and youâ€™re ready to build wealth. Youâ€™ve downloaded a budgeting app, and youâ€™ve set aside \$150 each month to save. Look at you! Thatâ€™s a massive step towards building wealth.

But now you face a dilemmaâ€”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. Itâ€™s your gleaming sword that can slash through false perceptions and help you conquer your savings goals.

Letâ€™s say for the time being, youâ€™ve kept some money in a â€śhigh-interestâ€ť savings account earning .5%. How quickly will that account double your money?

Simpleâ€”plug that interest rate into the Rule of 72, and you getâ€¦

##### 72 Ă· .5 = 144 years to doubleâ€¦

Thatâ€™s rightâ€”your money will take 144 years to double with your current savings strategy. Yikes! Thatâ€™s enough time to move from steam power to SpaceX.

But thatâ€™s not allâ€”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 getâ€¦

##### 72 Ă· 3.25 = 22 years

Think of it like thisâ€”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 resultâ€¦

##### 72 Ă· 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 isnâ€™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 youâ€™re heading towards financial disaster. Use it often, and discuss your findings with a financial professional.