Never heard of the Rule of 72? Thanks to Einstein, it’s a principle we can use to determine how long it can take to double an investment…or a debt. Here’s what you should know to grow your money better and reduce your debt.
Who wants to buy one car for the price of two? All you have to do is get a loan for six years at a 12% interest rate and pay it off as scheduled. Gross, isn’t it?
Actually, it’s compound interest. It’s bullish if you’re getting it, but a real beast if you’re the one paying it. Most people know about the magic of compounding investments, but it works the other way, too. And just as some rates are better for investments than others, debts should also be avoided with certain interest rates unless you enjoy doubling your debt.
What Is the Rule of 72?
Time isn’t the only factor, but it’s the biggest. The Rule of 72 is Einstein’s simple shortcut to figure out how long it takes for an interest-compounded value to double. It’s not exact, but it’s never more than half a year off. Just divide 72 by your interest rate, and there you have how long it would take for the loan or investment amount to double.
So, 1% would take 72 years to double. 5% takes about 15 years to double. 10% takes 7.2 years to double. 20% takes 3.6 years to double, and 36% doubles in just two years. So, if your loan duration is long, as in home loans, keep in mind it takes even less time for it to re-double (or quadruple). And it’s usually redoubling about half a year quicker for most good credit rates.
The Magic of 12%
As in the example above, if you’re buying a car with a loan (which is typically never more than six years), you want to stay under 12% interest to avoid paying double. And 12% is a magic number, too, being the first to quadruple in almost two years less time than it took to double originally. Therefore, as soon as your interest rate is 12% or higher, your debt is growing at the fastest rate possible.
How To Avoid Doubling Your Debt
Bad credit isn’t entirely hopeless, though. If you find yourself stuck in a position where you cannot get a good rate, you should then shop around for a loan that welcomes early payment. It’s more than avoiding early-payment penalties. The loan should also get recalculated every time you make a payment on the date you made the payment, regardless of due dates.
In other words, you can avoid doubling your debt if you can pay more often. Obviously, paying more than your obligation helps too, but you can effectively cut up to 10 points off your rate just by dividing your monthly obligation into at least bi-weekly, if not weekly, payments. So if you have a $400 monthly obligation, paying $100 every week cuts back on the interest accrual, saving thousands over the course of the loan.
However, that only works if your loan doesn’t have a static monthly payment term. Talk to the underwriter or loan advisor about the terms of your loan. They will be able to tell you whether it is amortized on payment or on a specific date, regardless of when you paid.
By the way, if you can’t get a used car loan under 12%, you should buy new. Legally, new car loans can’t exceed 8%, and you can still get an early-payment loan on that, too.
FAQs
Just divide 72 by your interest rate, and there you have how long it would take for the loan or investment amount to double. So, 1% would take 72 years to double. 5% takes about 15 years to double. 10% takes 7.2 years to double.
What is the Rule of 72 answer? ›
Just take the number 72 and divide it by the interest rate you hope to earn. That number gives you the approximate number of years it will take for your investment to double.
How do you double money using the Rule of 72? ›
The Rule of 72 is a calculation that estimates the number of years it takes to double your money at a specified rate of return. If, for example, your account earns 4 percent, divide 72 by 4 to get the number of years it will take for your money to double. In this case, 18 years.
What is the Rule of 72 debt? ›
What Is the Rule of 72? 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.
What is the Rule of 72 which amount will double faster? ›
If the interest per quarter is 4% (but interest is only compounded annually), then it will take (72 / 4) = 18 quarters or 4.5 years to double the principal. If the population of a nation increases at the rate of 1% per month, it will double in 72 months, or six years.
Does the Rule of 72 really work? ›
The Rule of 72 helps you determine how long it might take for your money to hypothetically double. It's worth noting, the “rule of 72” definition isn't necessarily perfectly accurate because past market results do not predict future market behavior.
What is the 50 30 20 rule? ›
Those will become part of your budget. The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.
How can I legally double my money? ›
The classic approach of doubling your money involves investing in a diversified portfolio of stocks and bonds and is probably the one that applies to most investors. Investing to double your money can be done safely over several years but there's more of a risk of losing most or all of your money if you're impatient.
How to double $2000 dollars in 24 hours? ›
The Best Ways To Double Money In 24 Hours
- Flip Stuff For Profit. ...
- Start A Retail Arbitrage Business. ...
- Invest In Real Estate. ...
- Play Games For Money. ...
- Invest In Dividend Stocks & ETFs. ...
- Use Crypto Interest Accounts. ...
- Start A Side Hustle. ...
- Invest In Your 401(k)
How To Double 10K Quickly
- Flip Stuff For Money. One of the more entreprenurial ways to flip 10k into 20k is to buy and resell stuff for profit. ...
- Invest In Real Estate. If you want a more passive approach to double 10k quickly, you can always consider real estate investing. ...
- Start An Online Business. ...
- Start A Side Hustle.
Errors and Adjustments
The rule of 72 is only an approximation that is accurate for a range of interest rate (from 6% to 10%). Outside that range the error will vary from 2.4% to 14.0%. It turns out that for every three percentage points away from 8% the value 72 could be adjusted by 1.
How long does it take to double my 401k? ›
Your investments
With an annual 4% return, it would take 18 years (72/4) to approximately double. With a 6% return, it would take 12 years (72/6), while with an 8% return it would take 9 years (72/8).
What is the rule 72 for 401k? ›
Rule 72(t) allows penalty-free early withdrawals from retirement accounts, but comes with major restrictions. While avoiding the 10% penalty, you still owe income taxes on distributions. Payments are fixed for 5+ years and can't be changed without penalty. You lose tax-deferred growth and can't contribute anymore.
What is the Rule of 72 to double? ›
The rule of 72 is a simple formula that shows how quickly your money will double at a given return rate. It works by dividing 72 by your annual compound interest rate and seeing how many years it will take for your investment to double.
Which answer is the correct calculation for the Rule of 72? ›
Rule of 72 Formula
Commonly, periods are years so R is the interest rate per year and t is the number of years. You can calculate the number of years to double your investment at some known interest rate by solving for t: t = 72 ÷ R.
What is the Rule of 72 quizlet? ›
Rule of 72. The number of years it takes for a certain amount to double in value is equal to 72 divided by its annual rate of interest.
How long does it take to double your money at 5 interest? ›
It would take 14.4 years to double your money. Applying the rule of 72, the number of years to double your money is 72 divided by the annual interest rate in percentage. In this question, the annual percentage rate is 5%, thus the number of years to double your money is: 72 / 5 = 14.4.
What interest rate would double your money in 5 years? ›
One can also use this to compute the returns a portfolio should generate to double money in a given time period. If you want to double it in five years, the portfolio should be invested such that it yields 72/5=14.4%.
How many years will it take to double an amount at 3 percent interest? ›
Does the rule of 72 work?
| Annual Interest Rate | Doubling Time (Compound Interest Formula) | Rule of 72 Estimated Doubling Time |
|---|
| 3% | 23.45 | 24.00 |
| 4% | 17.67 | 18.00 |
| 5% | 14.21 | 14.40 |
| 6% | 11.90 | 12.00 |
11 more rowsMar 29, 2023
You can also run it backwards: if you want to double your money in six years, just divide 6 into 72 to find that it will require an interest rate of about 12 percent.
