The Rule of 72
Craig
Hackler, Financial Advisor, Raymond
James Financial Services
“How long will it
take my investment to double?” This is a common
question many may have concerning their investments and think a calculator is needed to provide an
answer. But a calculator may not be needed, at all.
The tool to use is called the Rule of 72 and, best of all; it is simple and free.
This is how it works. If an individual has an
investment they think will grow at an assumed rate of return per year, then simply dividing that
rate of return into 72 will provide a rough estimate of the number of years it will take for the
investment to double in size.
For example,
let’s assume an investment is assumed to grow at an average rate of return of six percent each
year. Simply divide six into 72 will give a rough
estimate that it will take 12 years for this investment to double (72 ÷ 6 = 12).
This formula assumes a fixed annual rate of return and the reinvestment of all earnings.
Keep in mind that very few investments offer a guaranteed rate of return and that an
investment’s past performance does not guarantee future performance.
The rule of 72
may also be used to show the negative power of inflation. This
may be an especially handy tool to those individuals in their retirement’s years and, also, for
those approaching the retirement decision. Using this
tool an individual can estimate the number of years it will take for his or her cost of living to
double. Or put another way, how long before an
individual’s purchasing power is cut in half.
For example,
let’s assume an individual is retired and forecasts an inflation rate of five percent per year.
An inflation rate, in general terms, is the rate of increase in the prices of goods and
services individuals purchase over time. Forecasting an
inflation rate of five percent means the individual is assuming the prices of the goods and services
he or she will purchase in the future will increase at a rate of five percent per year.
Using the rule of 72, simply dividing five into 72 will provide a rough estimate that the
individual’s cost of living will double in 14 to 15 years (72 ÷ 5 = 14.4).
Of course, this
article is no substitute for a careful consideration of all of the advantages and disadvantages of
an investment strategy to meet your goals. Before
implementing a significant investment strategy consider consulting your financial advisor.
Craig
Hackler holds the Series 7 and Series 63 Securities licenses, as well as the Group I Insurance
license (life, health, annuities). Through Raymond James Financial Services, he offers complete
financial planning and investment products tailored to the individual needs of his clients. He will
gladly answer your questions. Call him at 512.894.3473 or 800.650.9517
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