Years to double $ = 72/r
r = interest rate
The rule of 72 is a simple formula for a quick and rough approximation of the number of years it takes to double money with a fixed compounding interest rate.
Say you are investing in the Straits Times Index (STI) with an 8% average annual return, you can expect to double your money in about nine years. In nine years, S$1,000 will turn into S$2,000, S$2,000 will turn into S$4,000, and so on.
Now let’s compare with putting your money in a savings account that earns you 1.5% interest rate, it will take roughly 48 years to double your money. If you put in S$1,000, it will take 48 years for it to turn into S$2,000. That’s almost 40 years difference!
If you would like to be precise, the actual formula is:
Years to double $ = 69.3/r
It’s not that easy to divide so usually we use 72/r, which is pretty accurate for common interest and return rates.
If you want to know the return you need to get to double your money in a certain number of years, you can use the same formula:
r = 72/years
So, if you want to double your money in 5 years, you will need:
72/5 = 14.4% annual return
Neat, isn’t it? This quick and easy formula can help you to calculate how much money and return you would need to have to have enough for retirement.
If you put in S$30,000 to invest in the STI at 30 years old, you will have a quarter million dollars before you reach 60 years old for this investment alone. To retire with more, you should invest more money when you are able to and diversify your portfolio to generate higher overall returns.