Definition
The rule of 72 is a simple equation that can help you determine when your money will double, based on the interest rate you are earning on your money. While this isn’t an exact science, and it does not account for every variable, it works pretty well to help you evaluate the best financial product for your situation.
How it Works
Say you have your money in a bank CD at a 6% interest rate, which has been the average total return rate since 1932. If you divide 72 by 6, you would get 12, which is how many years it would take for your money to double in the bank CD. If you put $1,000 in a CD at 6% interest, in 12 years, you would have $2,000.
Now, what if you had your money in a bond that paid out 8%? Again, you would divide 72 by 8, and you would get 9. If you had a $1,000 bond, by the end of 9 years, your bond would be worth $2,000.
However, if you had your money in the growth stocks (no dividends here), and you earned consistently 12%, by the end of 6 years, your money will have doubled.
Get Started Now!
Now that you see how it can work, you can start seeing the sense of getting started early with investing, because the earlier you start, the more money you can earn. The best way to get started is with a savings account or a bank CD. Why is that? Before you can be an investor, you have to be a saver. What does that mean? Well, it means that you must have enough money saved up to be able to put it in investments.
To start with, put your money into a bank savings account or a CD that will earn at least 4%, which has been the average rate of inflation. When you have accumulated enough to get started with, move about 1/3 of your money over to a higher rate, 10 year bond to provide a safety net should the stock market take another dive. (Which it most likely will.) Take another 1/3 and put into a couple dividend stocks…this will allow you to earn an income over the years. With the last 1/3 of your money, put into a few growth stocks to grow your retirement income.
Bottom Line
When you can put the Rule of 72 to work for you, it can be phenomenal what you can accomplish. Once you get your investment accounts set up, be sure to feed them consistently, so that your money will grow even more as time goes on. Compounding interest will help your money grow higher the more you put into it.
