Have you always wanted to see how fast you can grow your money? Well, double your money to be exact. If you’re an avid investor, or just have a lump sum that you’re curious about, the Rule of 72 is the perfect way to explore your plans in more detail.
If you’re currently in the process of investing, whether with eggs all in one basket, or several, the Rule of 72 can and will help you effectively plan for the future and enable smarter decision making.
Let’s start by looking at just what this “Rule of 72” is.
The “Rule of 72” is a simple, financial equation or ‘rule’ that quickly and effectively calculates how long it will take your investment to double given a fixed rate of interest. It’s a convenient, snappy way for investors to work out if any given investment is worth their time.
Being a financial equation to work out the time at which it would take an investment to double in size, it’s hard to believe that the Rule of 72 is really that simple. But it is.
There are many calculators out there which can do the hard work for you, most notably, Money Chimp’s Rule Of 72 calculator not only allows you to calculate doubling but tripling and quadrupling.
But, for those that are interested in having a go for yourself, here is the calculation in which the Rule of 72 derives from.
The formula to work out the Rule of 72 is actually rather simple, suffice to say this equation works with annually compounded interest, not simple interest – but more on that later.
So if you’re looking at an investment that has continuously compounded interest or annual interest, the Rule of 72 will work for you.
You can calculate the Rule of 72 for your investment using the following formula:
y = 72/r
With ‘y’ representing years, so how many years it would take to double your money and ‘r’ representing the rate of interest. All you do is divide the interest rate into 72 (or 72.7 if we’re getting technical).
The formula can also just as easily be tweaked to work out the opposite, at what rate of interest would you require to double your money in 8 years, for example. You can do that using this formula:
r = 72/y
We won’t bore you with the science behind it, mainly because only a scientist themselves could understand it. But again, Money Chimp has put together an in-depth guide into how the Rule of 72 is calculated and why it works.
The best way to understand the Rule of 72 is to see it in action. So, here it goes.
If you have an investment of £10,000 which has an interest rate of 9% PA, the following equation can be used to work out how long it would take to double your money.
y = 72/9
y = 8 (or 8.04 to be exact)
It’s all well and good being able to work out how long it would take to double your money, but why is this important? We’re glad you asked, and here’s why.
If you’re investing so you can retire early, the Rule of 72 is particularly important in establishing exactly when you need to start saving. And, subsequently when you can hang up your proverbial briefcase and put your feet up.
For example, if you’re 50 and you have £100K in the bank that you need to turn into £200K before you retire. At an interest rate of 6%, it would take you 12 years to do so. So you would be 62 by the time you could reliably retire.
This also works both ways, if you want to have enough money by the time you’re 60 to retire – you can reverse the formula to work out what interest rate you would need to double your money in 10 years. So, we need to divide 72 by 10, in which we get a clean 7.2% rate of interest needed.
There are endless investment opportunities out there such as short term investments and investments for passive income along with high yield investments – it can be near impossible to work out which can be the most beneficial for your individual circumstances. Well, with the Rule of 72 it’s much clearer.
If you’re an investment beginner, the Rule of 72 can prove an indispensable ally in navigating the world of investing. By being able to clearly see which investments could double your money in 5 years and which could double your money in 10, it can help distinguish the good from the bad investments.
The Rule of 72 can also be a helpful factor in determining the risk of an investment and can put the risk more in perspective in relation to the reward.
The Rule of 72 relies on the investment having annually compounded interest, or continuously compounded interest, but what if that isn’t the case? There is another significant type of interest that is a common sight in investments, this is called simple interest.
While compounding interest works to add your gross interest to the total and then rework out the interest based on the new total, simple interest is fixed during the investment period and doesn’t compound any accumulated interest. Therefore, the Rule of 72 formula doesn’t compute as the crux of the investment has fundamentally changed.
This isn’t a problem, but it can make working out the period at which is required to double your money slightly more or less complicated depending on how you look at it. So, how would you go about doing so?
As the name implies, simple interest is plain interest, no accumulation. However, even though the interest is simple, a formula is needed to work out how long it would take to double your money.
The following formula is essentially the Rule of 72 for simple interest:
y = ((i/100) xii) /i
With ‘y’ again representing years, ‘i’ represents the total investment amount and ‘ii’ represents the interest per annum. So, all you need to do to work out how to double your money is to divide the total investment amount by 100 and multiply it by the interest rate to get the amount which is generated each year, then divide by the total investment to show how many years.
For example, if your investment is an amount of £30,000 with an 11% rate of interest (fixed, per annum).
y = ((30,000/100) x11) /30,000
y = 9.09
Our investments vary in interest depending on the investment amount, the more that is invested the higher the interest rate, meaning that the more you invest the quicker it will be to reach the double mark for your investment.
It is entirely possible to double your money with Buy2LetCars, however, this is very much related to how much is invested. Let’s see how our different investment tiers weigh up in the Rule of 72 (or at least a formula that follows the same concept).
It would take 21.36 years to double your money with our 7% interest rate investment packages.
It would take you 13.84 years to double your money with our 9% interest rate investment packages.
It would take you 12.36 years to double your money with our 10% interest rate investment packages.
It would take 11.26 years to double your money with our 11% interest rate investment packages.
Buy2LetCars investment opportunities are an alternative investment option that provides a hands-free means to double your money. Why not see if we can do the same for you?
If you are interested in our investment opportunities, contact our team today on 0203 823 1032, or get in touch using our enquiries form. If you prefer a face to face chat, come and meet us at our walk-in centre, found at 1 Bell Parade, Glebe Way, West Wickham, BR4 0RH.
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