R72 – The Right Advice Before It Is Needed
The rule of 72 is often forgotten when discussing realistic future returns. This is often the case as it will shine its spotlight directly on the exact financial performance of your current investments.
The rule of 72 s a basic way to establish how long an investment will take to double, given a fixed annual rate of interest. By dividing 72 by the annual rate of return, investors will better understand how many years it will take for the initial investment to duplicate itself in other words double your money.
Example: The Rule of 72 states that 1 invested at 10% would take 7.2 years ((72/10) = 7.2) to turn into 2. In effect, a 10% investment will take 7.3 years to double ((1.10^7.3 = 2). When calculating low rates of return, the Rule of 72 is fairly accurate. This table parallels the numbers given by the rule of 72 and the definite number of years it takes an investment to double.
Observe that, although it acts a good guide, the rule of 72 becomes less precise as the rates of return become higher. Therefore, when dealing with higher rates, it is useful to calculate the exact number of years algebraically by means of the FV formula (Future Value). For additional information or help developing your investing techniques contact Schwabcore Management. Our asset managers are at hand to assist you and grow your portfolio.