Double Your Money
As we talked about in the post on compounding, higher interest rates will give you a bigger rate of return (ROI). Fortunately, the Rule of 72 paved the way to determine how long it will take for your money to double with a set interest rate. Of course, this only accounts for annual compounding, but it is still very useful.
The Rule of 72 History
The Rule of 72 comes from a book published in 1494 from an Italian mathematician, Luca Pacioli. Credit has also been given to Einstein, though there are no evidence of such. Anyways, the math shows how long it will take a sum of money to double in value using a specific interest rate
How It Works
The Rule of 72 is simple. You divide 72 by the interest rate as a percentage. You will double your money in that many years. For example, if you had an interest rate of 10%, 72/10 = 7.2. It would take 7.2 years to double your money of course, in reality, this is more of a generalization. If you were to actually do the math, the time it takes is 7.3, but the Rule of 72 will get you in the ballpark.
What This Looks Like
You have $1,000 invested in the stock market at an average rate of return of 8%. Using the Rule of 72 (72/8=9), you will have $2,000 9 years later. Using the same math and ROI, you will have $4,000 at year 18.
Double Your Money with Compounding
Up to this point, the interest was simple annual interest. But what if you have a savings account with monthly compounding? I wont bore you too much with the logarithmic math, just know it comes out to a Rule of 69.3 where 69.3 is divided by the interest rate for that period. This will come out with the number of periods it would take to double.
What This Looks Like
That same $1,000 invested in the stock market, but you get dividend payouts each month of 1%. Using the compounding rule, it would take 69.3/1 = 69.3 periods to double your money. Since the payout is monthly, it would take 5.775 years to double your money.
Disclaimer
Once again, I am not a financial advisor. These tips are some things I have validated with my own personal experiences. If you feel you need more personal advice, please consult a professional financial advisor.
