Home » An Introduction to the Rule of 72

An Introduction to the Rule of 72

Introduction

The Rule of 72 is a formula used in investing that helps investors estimate how many years it takes to double the value of your investments.

The formula for the Rule of 72 is simply 72 divided by our annual rate of return.

The reason the Rule of 72 is so helpful in investing is that it helps determine how long it would take to double money based on a annual rate of return and also can help illustrate the power of compounding. Investments do not grow in a straight line. Instead, they compound, which means they grow exponentially. This is because returns happen on both principal and accumulated interest.

An easy example

To better understand this concept, look at the example below.

Let us first assume that an investor, who we will call Lucia, invests in stocks and will earn a 10% rate of return per year. Knowing that and the Rule of 72 allows us to determine that she will have approximately twice as much money as she does today in 7.2 years. We know this because we calculate 72/10 = 7.2 years.

Now lets compare how long it takes Tiffany to double her money as she earns a bit more each year because she works with an investment advisor. Her advisor helps her invest in the stocks of good businesses, encourages her to keep a long term perspective, and makes it easy for her to contribute regularly to her investment account. Because she does these things, she earns a bit more than Lucia and over time makes a 15% return per year. In this example, Tiffany would only take 4.8 years to double her money. We know this from our calculation 72/15 = 4.8.

That’s much faster than Lucia!

Despite that, both Lucia and Tiffany benefit by investing in stocks and bonds instead of putting all their money into a savings account. This is because in a savings account, money earns very low returns. In fact, as of August 2021, the average returns earned in savings accounts in the United States was only 0.06%.

Assuming that instead of investing in stocks or bonds, Tiffany and Lucia simply put their money into savings accounts that earn the average return of 0.06% per year. The Rule of 72 tells us that it would take Tiffany and Lucia approximately 1200 years to double their money.

That does not sound like a great way to achieve their financial goals.

Summary

The Rule of 72 is a very useful tool for investors to determine how long it will take to double their money assuming an annual rate of return. It also helps explain compounding and puts into context why you should be investing at least a portion of your hard-earned dollars in stocks and bonds rather than a savings account.

To get started making your money work for you like Tiffany and Lucia, open an account today.

Metas Investments LLC (“Metas”) is an investment adviser registered with the State of Texas and our fees and services are more particularly described in Form ADV Part 2A.
This presentation provides general information about the business practices and professionals of Metas. The information is not intended, and should not be construed, as legal, tax or investment advice. The information provided has not been approved or verified by any state or federal securities authority. Additional information about Metas is available on the Securities and Exchange Commission website at www.adviserinfo.sec.gov.
General Disclosure
This presentation is for informational purposes only and does not constitute an offer to provide advisory or other services by Metas in any jurisdiction in which such offer would be unlawful under the securities laws of such jurisdiction. The information contained on this presentation should not be construed as financial or investment advice on any subject matter and statements contained herein are the opinions of Metas and are not to be construed as guarantees, warranties or predictions of future events, portfolio allocations, portfolio results, investment returns, or other outcomes. Viewers of this presentation should not assume that all recommendations will be profitable or that future investment and/or portfolio performance will be profitable or favorable. Metas expressly disclaims all liability in respect to actions taken based on any or all of the information on this presentation. Past performance does not guarantee future results. All investing involves risk. Investment return and principal value will fluctuate with changes in market conditions. Current performance of positions may be higher or lower than presented in this report. Nothing in this report should be construed as an offer, recommendation, or solicitation to buy or sell any security. Additionally, Metas Investments does not provide tax advice and investors are
encouraged to consult with their personal tax advisors.

Metas Investments

11111 Katy Freeway STE 910
Houston, Texas 77079