The Rule of 72: Meaning and Examples
 

The Rule of 72: Meaning and Examples


Do you know the rule of 72? It is a rule to calculate how long it will take to see our capital grow that, although it is not scientific, it is very effective when it comes to estimating how long we will have to wait to see our money multiply.

Immerse yourself in this interesting article from Empirex Capital

What is the Rule of 72?

The rule of 72 is a simple rule to try to approximate how long it will take to double our capital given a specific return.

As you will see, it is a very simple equation and, therefore, we can also move the variables so, instead of knowing how long it will take to double our capital given a return, to know what return we need to double our capital in a specific period of time.

The formula for this rule is as simple as the following:

Time = 72 / Profitability

That is, given a return of, say, 10%, it will take 7.2 years to double our capital. If the return is 5%, by the same formula, we know that it will take 14.4 years.

Obviously, this is not an exact rule, but it does help us quickly and reasonably accurately approximate how long it will take to double our investment.

Again, we can change the variables to get other information. For example, suppose we want to double our capital in 5 years. What profitability do I need to achieve it? All you have to do is apply the formula in reverse:

Profitability = 72/time

In our example, 72/5 = 14.4. Therefore, 14.4% is the return I will need to double my capital in 5 years.

Isn't that a surprisingly useful and simple formula? You can almost do the calculations in your head without the need for paper and a pen!

Advantages of the rule of 72

Here are the advantages of the rule of 72:

Simple. First of all, it is a very simple formula and, therefore, does not require paper or a pen (let alone a calculator). Anyone can do the rough calculations in their head without too much difficulty.

Easy to remember. Another important point is that it is an easy rule to remember, so we can always carry it with us without taking up much space in our heads. This is important to have useful information when business or possible investments are presented to us.

Quick. Other formulas take a long time to output the final data. This formula is not one of them. In a matter of seconds you will have information on how long it will take to double your capital or what return you will need to achieve it.

Versatile. Another interesting feature of this rule is that it is versatile. It helps you both to know how long it will take to double your capital and to know what profitability you need to double it given a time period.

Valid for any type of investment. It does not matter if you invest in real estate, cryptocurrencies on the stock market or in time deposits. This rule will serve you for any type of investment.

Created on 3rd Mar 2022

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