The Rule of 72: A Simple Guide to Doubling Your Investment - TribPapers
Finance

The Rule of 72: A Simple Guide to Doubling Your Investment

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Asheville – If you’ve ever wondered how long it will take for your investment to double, the Rule of 72 is your new best friend. This straightforward formula can help you grasp the power of compound interest without needing a PhD in finance.

What Is the Rule of 72?

The Rule of 72 is a quick way to estimate how long it will take for an investment to double based on a fixed annual rate of return. To use it, simply divide 72 by your expected annual return. For instance, if you anticipate a 9% return, it will take about eight years for your investment to double (72 divided by 9 equals 8).

Brent Ford is a Wealth Management Advisor and is the Managing Director at White Oak Financial in Asheville.

Brent A. Ford, a Certified Financial Planner and Managing Director at White Oak Financial Management Inc, emphasizes the rule’s utility in various contexts. “I love talking about the Rule of 72 and use it in a variety of situations,” he said. He often employs it to help clients understand market dynamics, such as when the Dow reached 40,000, clarifying that this milestone didn’t necessarily indicate a market bubble, but rather was in line with a series of doubles in keeping with the Rule of 72.

Using the Rule for Inflation Awareness

The Rule of 72 isn’t just for gauging investment growth; it can also help you understand inflation’s impact on your purchasing power. If inflation is at 3%, dividing 72 by 3 shows that your purchasing power will be halved in about 24 years. This perspective is crucial for long-term financial planning, as it highlights the importance of earning returns that outpace inflation.

A Motivational Tool for Young Investors

Ford also finds the Rule of 72 particularly effective when speaking with younger clients. He illustrates how starting early can lead to significant financial growth over time. For example, if a 28-year-old invests $20,000 at an average return of 10.2857%, their money would double every seven years.

“Let’s say you’re 28 and you’ve saved/inherited $20K,” Ford explained. “By age 35, that’s $40K; at 42, it’s $80K; and so on.” He shared a compelling projection: by age 85, that initial investment could grow to over $5 million if consistently invested and compounded over time. “The last double is always the biggest and that’s the one we’re after,” he added.

This aspirational approach not only motivates young investors but also underscores the importance of starting early. The more doubles you experience in your lifetime, the greater your potential wealth accumulation.

In summary, the Rule of 72 serves as a powerful tool for both understanding investment growth and recognizing the effects of inflation. Whether you’re a seasoned investor or just starting out, this simple formula can provide valuable insights into your financial future.