The Rule of 72

The Rule of 72 will offer a rough estimate of how long in years it would take the initial investment to double or grow by 100%.

One of the fastest ways to grow your investment is to activate the power of compound interest through re-investing your gains. This way, you are not just trying to make good investments but you are also letting your earnings work for you so as to generate even more earnings.

With compounding, every investor can very easily generate additional growth percentages annually on their portfolios. Wealth is accumulated over longer periods of time and when you add your profits in terms of dividends of interests, your investments grow exponentially and you now make profits from both your invested capital and your initial gains.

It is no wonder that renowned scientist and genius, Albert Einstein, is said to have called compounding the eighth wonder of the world.

A common way to determine the power of compounding is known as “The Rule of 72.” The Rule of 72 is a very simple shortcut in calculating the rate of compounding at a given interest rate or expected investment return.

This method simply shows you the period of time that it will take an investment to double when a fixed annual rate of interest is in use. The formula to determine this is simply to divide 72 by the annual rate of return.

In other words: Years to double = 72 divided by interest rate on an investment

The result of this would offer a rough estimate of how long in years it would take the initial investment to double or grow by 100%.

While the result is not 100% accurate, (calculators and excel sheets actually have inbuilt functions to accurately calculate the precise time required to double the invested money), this formula is great because it helps you have a fast mental picture of the value of your investment and the expected length of its growth based on your current fixed interest rate.

What this means is that if you invest your money at a 10% interest rate, 72/10 would show you how many years it would take it to double; that is, 7.2 years. At a 9% rate of return, it would be 72/9 and this would give you 8 years.

The formula doesn’t just work for calculating investments. It is also useful for calculating inflation, GDP or even population, just as long as there is a fixed growth rate. For example, if Nigeria’s GDP grows at a fixed rate of 5% annually, it means that the economy would double in 14.4 years (72/5).

The advantage of this is that you can now easily compare investments, one to another, by determining how long it would take for each one of them to double instead of just looking at the interest rates independently. It also shows you the power of time and compound interest.

Written by Lawretta Egba.