The Rule Of 72:
Some people believe that Albert Einstein created a “rule of thumb” mathematical formula for calculating how long it will take to double an investment based on the interest it earns each year. That formula is known as the rule of 72.
There is, however, plenty of evidence that the rule of 72 predates Albert Einstein and he couldn’t have possibly created the formula. It may have been attributed to him because he considered compound interest to be the “eighth wonder of the world”.
Regardless of where the rule of 72 came from, it’s a real formula that can be used to determine approximately how long it will take for your money to double, based on it’s the rate of return, or interest earned.
The rule of 72 isn’t exact, but it’s a pretty close and quick calculation.
Let’s Take a Look at the Rule Of 72 Formula:
While Einstein is noted for one formula (E=mc2) that became his trademark formula, it is quite complex and highly theoretical.
The formula for calculating how long it takes to double your money, on the other hand, is quite simple. When the rule of 72 is applied to a yearly rate of return (ROR), or annual percentage yield, you can quickly determine how long it will take to double your money. The rule of 72 formula looks like this:
72 / ROR = How long it will take to double your money.
For example, if you buy a $1000 savings bond that earns 6% interest each year, you can apply the rule of 72 and discover that it will take 12 years for your original investment to double, or be worth $2000. You can plug in the numbers and write it like this:
72 / 6% = 12 years
The rate of return is irrelevant to the formula. The rule always applies. Let’s look at another example. Let’s say you buy an indexed annuity that averages a yearly yield of 8%. Here’s how this example looks:
72 / 8.0% = 9.0 years
In the example above, it takes 9 years to double your money at a growth rate of 8%. So you can see that investing your money early and wisely is a good idea. It’s never too early to begin investing! The earlier, the better of course, but for anyone at any age, the time to start investing is now.
If you begin investing when you are 21 years old, you have more time to let your investment grow throughout your life than you would if you say, are 50 years old. This author believes that it really does not matter what age you are, whether you are 18 or 80, investing is a good thing. If not for you, then for your legacy…for your children and grandchildren. Think of the head start you can give them…
Compound interest is a truly marvelous thing for every investor to take advantage of. The rule of 72 is not an exact formula, just a rule of thumb, but it’s pretty close at any rate of return.
Here’s an actual Albert Einstein quote: