Rule of 72 Doubles Money

The Rule of 72 is a simple mathematical shortcut to understand compound interest and calculate how long it takes money to double. Here's how it works and why it matters.

Core Concept

• Divide 72 by the annual rate of return to find years needed for money to double
• Example: At 7% return, money doubles in approximately 10 years (72/7 = ~10)
• At 10% return, money doubles in approximately 7 years (72/10 = 7)

Three Key Variables in Compounding

• Starting capital amount
• Annualized rate of return
• Length of runway (time horizon)

Real World Application Example

• 22-year-old investing $10,000 in an index fund
• Index returns 10% annually (historical average)
• By age 64 (42 years later):
  • Money doubles every 7 years
  • 6 doubles over 42 years
  • $10,000 becomes $640,000 (2^6 × $10,000)
• Additional annual savings compound similarly
  • Age 23: $11,000 invested
  • Age 24: $12,000 invested
  • Each contribution follows same doubling pattern

Why It Matters

• Helps understand the power of compound interest
• Shows importance of starting to invest early
• Demonstrates how small differences in return rates significantly impact wealth
• Makes complex math accessible for financial planning
• Essential tool for retirement planning and wealth building

Practical Advice

• Start investing early to maximize compound interest
• Use index funds for consistent long-term returns
• Take advantage of tax-advantaged accounts like 401(k)s
• Make regular contributions to benefit from dollar-cost averaging
• Focus on consistent saving and investing over time