The name of the game which involves number 72 is not Parcheesi which has 72 spaces from start to finish. I’m referring to the game of “How long does it take to Double your Money“. It is a game that has only one rule… The rule of 72.
When you invest to determine when your money will double you need to know a couple of things. The first is what interest rate are you getting? The second is you need to know the rule of 72. This is useful in figuring out what is a good investment or a not so good investment.
The rule of 72 is the following:
Take your interest rate and divide that into the number 72 to determine how many years it will take for your money to double.
Let’s do some examples:
A bank account pays 1% interest on a savings account.
72/1= 72 years
A dividend bearing stock pays 2% ROI in dividends.
72/2= 36 years
An index fund has 8% growth annually.
72/8 = 9 years
A credit card has an interest rate of 20%.
72/20= 3.6 years
A mortgage has 5.5% interest rate.
72/5.5= 13.09 years
The rule is a useful tool to determine if you are getting a good deal or not with interest rates. The loan information of the mortgage and the credit card are good examples of how a lending institution makes money on consumers. It really puts the money earned into perspective when you see how long it takes to double your savings account. This helps me divide an investment vs. a savings in my mind.
A investment in my mind needs to double in 10 years which is 7.2% interest rate using the rule of 72. The interest rates below that are just insurance / emergency fund rates. (The investment needs to be easy, short term, and liquid to make it worthwhile.)
If you really want to go crazy use replace the 72 with 115 and divide your interest rate to determine how long you will triple your money. Use 144 as the magic number if you are planning to quadruple your money.
Knowing how long it will take to double your money can help with planning your cash flow in and out of your wallet.