While we financial advisors need to know a lot about numbers, we often use some shortcut “rules-of-thumb” to make quick estimates. Two of those rules-of-thumb are the Rule of 72 and the Rule of 115.
The rule of 72 is a shorthand way to figure out how long it will take an investment to double in value, if one knows the annual rate of return or interest rate. The equation can also be switched around to figure out the annual rate of return if one knows how long it took for the investment to double.
It is called the rule of 72 because the doubling time is figured out by dividing the rate of return by 72. For example, an investment earning 6% per year will double in 72/6 = 12 years. An investment earning 8% will double in 72/8 = 9 years.
Flipping the equation around to determine the rate of return is done as follows. If an investment doubles in value in 10 years, the annual rate of return is 10/72 = 7.2%.
The rule of 72 is an approximation that is based on annual compounding. The true results will differ slightly. Many investment returns are based on continuous compounding which grows a bit faster than annual compounding. For situations involving continuous compounding, use 69.3 instead of 72.
The Rule of 115 is used to figure out how long it will take for an investment to triple in value. It follows the same process as the Rule of 72. If an investment earns 7% per year, it will take 115/7 = 16.4 years for the investment to triple in value. As with the Rule of 72, the Rule of 115 is an approximation. There are some practitioners that learned this as the Rule of 114. 115 slightly overestimates the time it takes for an investment to triple and 114 slightly underestimates it.
If you have REALY big aspirations… use the Rule of 144 to calculate, your investment will quadruple!Tagged with: finances • investing • Money and Finances