Mastering the rule of 72 is must simpler than mastering your local par 72 course. If you want to know the length of time it would take to double your money for a certain interest rate, then you can use a simple rule of thumb. That rule of thumb is known as the “Rule of 72”.
The rule states that to find the number of years required to double your money at a given interest rate, you just divide the interest rate into 72. As an example, to find the estimated time frame to double your money at an interest rate of 6%, then divide 6 into 72 for a result of 12 years.
Years to double = 72 / Interest Rate %
Conversely, you can also determine the required interest to double your money within a specific time period. Using the previous example, you could work backwards to determine the required interest rate needed to double your money in 12 years. For example, you determined you have $25,000 and need $50,000 in 12 years. You want to know what interest rate would be required, so you are able to align potential investment options with your financial goals. Based on the following formula, the results compute to 6%.
Interest Rate % to double = 72 / Years
So given the information, you should consider how this impacts your retirement portfolio. In order to help you, I have provided some thought provoking questions.
- How many years would it take my portfolio to recover from the recent market crash?
- What interest rate do I need to double my money within the next 10 years?
- How long will it take for my CD to double based on my current interest rate?
The above questions should provide some direction for you to consider. The goal of the article is to give you enough information that you can now consider when planning your retirement portfolio. The key is understanding your investment time horizon and the impact the applied interest rate has on your ability to achieve your retirement goals.
