What It Is And How To Calculate It

When we put our money in the market, or before we do, one of the biggest questions we have is: How long does it take for this investment to actually grow?

Luckily, there’s a math shortcut that helps you estimate the future value of an investment. Rule of 72 is a quick way to find out about the number of years it takes to double your invested amount.

Using your rate of return, the Rule of 72 is a simple formula for measuring the impact of compound interest on your investment dollars. As a new part, compound interest is calculated on your principal amount, plus your accrued interest. It basically pays interest in lieu of interest and is a big boon when it comes to investing in the markets as your profits are automatically reinvested, making even more money.

To use the Rule of 72 formula, simply divide 72 by the expected annual rate of return. Note that the formula assumes the same rate over the life of the investment.

For example, let’s say you invest $50,000 in mutual funds have an assumed average return of 6%. Using the Rule of 72 formula, your calculation would look like this: 72/6 = 12. This tells you that, with a 6% annual rate of return, you can expect the investment doubled — to $100,000 worth — in about 12 years.

When calculating the Rule of 72 for any investment, keep in mind that this formula is an estimator and that the years are approximate. The Rule of 72 mainly works with common returns between 5% and 12%, with 8% returns being the standard of accuracy. Ratios lower or higher outside of this range may be better predicted using the Adjustment Rule of 71, 73, or 74, depending on how far below or above the range they fall. You usually add one to 72 for every three percentage point increment. So a 15% return means you use the Rule of 73.

Remember that mutual funds or index funds are smart investment choices, especially for beginners, as it offers instant diversification by pooling money from many individuals to invest in. a set of companies. They also provide predictable returns over the long term. For example, S&P 500 index funds have returned an average annual return of about 11% since 1950, possibly with significant downward and upward movements over a number of years.

Robotic advisors like Wealthfront, Betterment, and SoFi will build you a portfolio of index funds (usually in the form of ETFs) based on your risk tolerance, time horizon, and investment goals. These are good platforms to use when you are just starting to invest as robot advisors automatically rebalance your portfolio for you and as you get closer to your investment goals. If you want more control over your investments, consider a commission-free brokerage, like Charles Schwab or Fidelity.

The Rule of 72 can also help you see how long it will take effect of inflation to cut your money in half.

For example, let’s say you have $100,000 and expect a hypothetical long-term inflation rate of 3%. Since inflation reduces your purchasing power over time, your $100,000, if left uninvested, will lose half its value (aka $50,000) in 24 years. The calculation for this looks like: 72/3 = 24. If inflation goes from 3% to 6%, that $100,000 will lose half its value even faster – in just 12 years ( 72/6 = 12).

The Rule of 72 is an easy way to quickly figure out when your investments will double in value. It can also help you see how early or far inflation will eventually halve the value of your money.

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