The Rule of 72 is a simple way to determine how long an investment will take to double given a fixed annual rate of interest. Dividing 72 by the annual rate of return gives investors a rough estimate of how many years it will take for the initial investment to duplicate itself.
The Rule of 72 is not precise, but is a quick way to get a useful ballpark figure.
For investments without a fixed rate of return, you can instead divide 72 by the number of years you hope it will take to double your money. This will give you an estimate of the annual rate of return you’ll need to achieve that goal.
The calculation is most accurate for rates of return of about 5% to 10%.
For more precise outcomes, divide 69.3 by the rate of return. While not as easy to do in one’s head, it is more accurate.
For example, the Rule of 72 states that $1 invested at an annual fixed interest rate of 10% would take 7.2 years ((72 ÷ 10) = 7.2) to grow to $2.
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You know that investments have to do more than keep pace with inflation for you to build wealth. As Golden says,
“A dollar today is not worth a dollar in the future.” But how do you determine what your investment return is after inflation?
This equation helps you compute your real return, or your return adjusted for inflation.
For example, if an investment returns 8 percent, and inflation is 3 percent, this is how you’d set up the problem:
[ ( 1.08 ÷ 1.03 ) - 1 ] x 100 = 4.85 percent real return
“You’re losing to inflation every year,” says Charles Sachs, a wealth manager at Kaufman Rossin Wealth in Miami.
“Long term, inflation runs about 3 percent. So your money buys half as much in 20 years.”
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