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The Rule of 72

You have a sum of money that you want to save for the future… So how long will it take for that money to accumulate? That depends on your interest rate, of course. If you stash your cash in a savings vehicle that pays compounding interest, you can actually expect that money to double at some point. But when?
There are two ways to answer this question. One involves a complex mathematical formula, using your balance and your interest rate, but most of us have long forgotten our high school algebra class. You can certainly spend time calculating your return using that clunky old formula if you wish, but there’s actually a much easier way to answer this question… It’s called the “Rule of 72” and it’s actually a very simple formula. All you do is divide the number 72 by your interest rate, and presto! The number you get equals the number of years it will take to double your money. It looks like this: 72/interest rate = number of years to double your money It’s that simple! And the best thing about this formula is that it’s so easy to see how changes in your interest rate can result in a much larger balance over the same time period. For example, divide 72 by the interest rate of 4 percent, and you can see that it will take 18 years for your balance to double. But if you perform the same equation with an interest rate of 8 percent, you will see that your money doubles in only 9 years. In 18 years, your money could quadruple instead of doubling! Now look at what happens if your interest rate triples to 12 percent. Your money would double in just six years! When you use this formula, it’s easy to see how your interest rate helps you to accumulate wealth. And of course, it can help you determine when you might be able to retire. For more information on saving for retirement, give us a call. Using the Rule of 72 is a great start, but you probably have many more complex questions about retirement planning… And we’d be happy to help. This article originally appeared on arandmoneyinfo.com.
Denise-Arand,Author: Denise Arand Denise Arand, Executive Vice President of Five Rings Financial West Coast: Denise believes that everyone is entitled to send their kids to college, retire with dignity, and save a pile of money for the future. She is passionate about making proven financial solutions available in an easy to understand way that brings hope to women, the middle-class, and those without nine-figure portfolios.


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