Rule of 72
Q: So how do you double your money every 5 years?
A: Earn a compound return of 15% every year.
Don’t believe?
OK say you have $1 now. Take out your calculator and go 1 x 1.15 – that gives you $1.15 – this is the amount you have at the end of the first year.
Then take that 1.15 and multiply by 1.15 for 4 times (the next 4 years). So you should be doing:
1 x 1.15 x 1.15 x 1.15 x 1.15 x 1.15
By now you should get 2.01, so your $1 has become $2.
OK wait, there’s an easier way to do it. It’s called the RULE OF 72. This just means you take 72 and divide it by the number of years in which you wish to double your money. That is the investment return you need to achieve your goal.
EG. You want to double your money in 7 years. What investment return do you need to achieve this?
Answer: 72 divide by 7 = You will need 10.3%
OK now go try and see!
NOTE: The Rule of 72 has limitations. It will work for a small range of numbers only. Say if you want to double your money in 3 years, the formula is not gonna work.
Hmmm… maybe you should not set such unrealistic targets in the first place?
