For some, the Rule of 72 (Rule of 72) is unknown, but for others it is not. Warren Buffett He uses it to quickly calculate how profitable an investment will be, so why can't you? In this article we will see how the rule of 72 works, some examples and important data that we must consider when using it.
What is the rule of 72?
Using this rule, investors can estimate how many years it will take for an initial investment to double. If you know the rate of return, you can know the time required and if you know the time, you can roughly calculate the rate of return.
r * n = 72
r (or it can also be expressed as "i") = interest rate or rate of return
n = number of years
Years needed to double an investment at "x" rate of return:
= 72 / r (rate of return)
Rate of return required to double the investment at “x” years:
= 72 / n (number of years)
Examples of rule 72
An investment of 12% will be doubled in 6 years:
- 12 * n = 72
- n = 72/12
- n = 6 years
For an initial investment to double in 4 years, you will need a rate of return of 18%:
- r * 4 = 72
- r = 72/4
- r = 18%
An investor has an annual return of 8% and it will take him 9 years to double his investment:
- 8 * n = 72
- n = 72/8
- n = 9 years
With a 10% rate of return, it will take 14.4 years to quadruple an investment:
- 10 * n = 72
- n = 72/10
- = 7.2 years
- 7.2 * 2 = 14.4 years
Other uses of the rule of 72
- If your country's GDP grows at 6%, it will take 12 years to double it.
- If the inflation rate is 7%, your money will lose half its value in 10.28 years.
Considerations to keep in mind when using the rule of 72
- The Rule of 72 assumes that you reinvest dividends and capital gains or in short: that once the money is invested, you don't touch it at all and let the magic of compound interest do its job.
- The number 72 is chosen as the most practical numerator, since it has many small divisors such as 1, 2, 3, 4, 6, 8, 9 and 12.
- It gives you a good approximation for an annual rate of return between 4.9% and 11%.
- If you want a result between 0% to 0.5%; You use the Rule of 69.
- If you want a result between 0.5% to 4.9%; the Rule of 70.
- If you use this formula at high rates, the rough estimate becomes less accurate and in that case, it is better to use the Final Capital or Future Value function.
I thank Paco for once again letting me publish in such a prestigious site and to all of you regular readers 🙂
What do you think of the Rule of 72? Did you already know her? Do they apply it? We wait for your comments. 🙂
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