The next time you’re talking investments with your friends or fellow nurse practitioners, here’s an extremely helpful trick that can make you seem like a finance wizard. It’s called a rule of 72, and it’s simple to use yet so effective.
Here’s how the rule of 72 works: Divide the number 72 by the anticipated rate of return. The result will be the approximate number of years it should take until your investment will double.
Here’s an example. Let’s say you’ve got $10,000 and are considering an ETF that has an average return of around 8 percent per year. Using the Rule of 72, it would take:72 / 8 = 9 years before your money will double to $20,000.
Note that for simplicity, the Rule of 72 only takes into account only your initial investment. If you wanted to figure out how much that same investment would be with additional contributions, then more complex calculations would be necessary.
Alternatively, the Rule of 72 can also be rearranged to find the interest rate needed to double your money. This can be helpful for screening investment claims that sound too good to be true.
For example, let’s say someone brags that they know of an investment that’s “guaranteed” to double your money in just four years. Using the Rule of 72, you can quickly determine that this would mean you’d need a rate of return of at least 18%. I don’t know about you, but I don’t know of any investments that guarantee an 18% return. Sounds like a scam to me!
The Rule of 72 can also be used for other applications. For example, if you know, the average rate of inflation is 4%, then using the Rule of 72 we can conclude that the price of nearly everything will double in approximately 18 years.
The next time you’re reviewing investment prospects or talking finances with another person, try using the Rule of 72. The more you start to work with it, the more helpful you’ll find out that it can be.