So you’ve got a chunk of change and the know-how to put your money into an account that earns compoundING interest.
How long does it take for your money to double in that account? Well to find this out you need two things: your balance and your interest rate. Now, like most things there’s an easy way to find your answer and a hard way. The hard way involves taking the logarithm base 10 of 2. Two as in, two times our balance over the logarithm base 10 of 1 plus our interest rate. (Apologies for causing any unnecessary math class flashbacks.) Since most of us don’t have bionic brains, we can’t really crunch numbers like these in our heads.
The simple way to make an educated guess about how long it takes for your money to double in a compound interest account? The Rule of 72. The way it works is surprisingly easy (and won’t require a graphing calculator). All you do is take the number 72 and divide it by your interest rate. That’s it! It really is that straightforward. The number you get equals the number of years it’s going to take to double your money.
Let’s try it out: Say you have $5,000 in your account earning 4% interest. Now take that magical number 72, take your interest rate of 4%, pull out your phone and text your 2nd grade cousin and ask him how many times 4 goes into 72. He’s a bright kid, so he’ll tell you the answer is 18, and you’ll tell him that he just helped you learn that it will take 18 years for your initial $5,000 to double into $10,000.
Using the Rule of 72, it’s easier to see how small changes in interest rates can make a huge difference in earning potential. A 29-year-old earning 4% compounding interest can expect his account to double twice by the time he’s 65. At 8%, it doubles 4 times. At 12%, it doubles 8 times. So by doubling your interest rate from 4% to 8% you actually quadruple your money. And by tripling your rate from 4% to 12% you sixteentuple your money. That’ll work.
Interest rates matter. The Rule of 72 shows just how much they matter. So how many doubling periods does your nest-egg have before you retire? Now you know the easy way to find out.