Never heard of the Rule of 72? Thanks to Einstein, it’s a principle we can use to determine how long it can take to double an investment…or a debt. Here’s what you should know to grow your money better and reduce your debt.
Who wants to buy one car for the price of two? All you have to do is get a loan for six years at a 12% interest rate and pay it off as scheduled. Gross, isn’t it?
Actually, it’s compound interest. It’s bullish if you’re getting it, but a real beast if you’re the one paying it. Most people know about the magic of compounding investments, but it works the other way, too. And just as some rates are better for investments than others, debts should also be avoided with certain interest rates unless you enjoy doubling your debt.
What Is the Rule of 72?
Time isn’t the only factor, but it’s the biggest. The Rule of 72 is Einstein’s simple shortcut to figure out how long it takes for an interest-compounded value to double. It’s not exact, but it’s never more than half a year off. Just divide 72 by your interest rate, and there you have how long it would take for the loan or investment amount to double.
So, 1% would take 72 years to double. 5% takes about 15 years to double. 10% takes 7.2 years to double. 20% takes 3.6 years to double, and 36% doubles in just two years. So, if your loan duration is long, as in home loans, keep in mind it takes even less time for it to re-double (or quadruple). And it’s usually redoubling about half a year quicker for most good credit rates.
The Magic of 12%
As in the example above, if you’re buying a car with a loan (which is typically never more than six years), you want to stay under 12% interest to avoid paying double. And 12% is a magic number, too, being the first to quadruple in almost two years less time than it took to double originally. Therefore, as soon as your interest rate is 12% or higher, your debt is growing at the fastest rate possible.
How To Avoid Doubling Your Debt
Bad credit isn’t entirely hopeless, though. If you find yourself stuck in a position where you cannot get a good rate, you should then shop around for a loan that welcomes early payment. It’s more than avoiding early-payment penalties. The loan should also get recalculated every time you make a payment on the date you made the payment, regardless of due dates.
In other words, you can avoid doubling your debt if you can pay more often. Obviously, paying more than your obligation helps too, but you can effectively cut up to 10 points off your rate just by dividing your monthly obligation into at least bi-weekly, if not weekly, payments. So if you have a $400 monthly obligation, paying $100 every week cuts back on the interest accrual, saving thousands over the course of the loan.
However, that only works if your loan doesn’t have a static monthly payment term. Talk to the underwriter or loan advisor about the terms of your loan. They will be able to tell you whether it is amortized on payment or on a specific date, regardless of when you paid.
By the way, if you can’t get a used car loan under 12%, you should buy new. Legally, new car loans can’t exceed 8%, and you can still get an early-payment loan on that, too.
FAQs
Just divide 72 by your interest rate, and there you have how long it would take for the loan or investment amount to double. So, 1% would take 72 years to double. 5% takes about 15 years to double. 10% takes 7.2 years to double.
What is the Rule of 72 answer? ›
For example, the Rule of 72 states that $1 invested at an annual fixed interest rate of 10% would take 7.2 years ((72/10) = 7.2) to grow to $2. In reality, a 10% investment will take 7.3 years to double (1.107.3 = 2). The Rule of 72 is reasonably accurate for low rates of return.
What is the Rule of 72 debt? ›
The Bankrate promise
The Rule of 72 is a calculation that estimates the number of years it takes to double your money at a specified rate of return. If, for example, your account earns 4 percent, divide 72 by 4 to get the number of years it will take for your money to double.
What is the Rule of 72 for dummies? ›
Do you know the Rule of 72? It's an easy way to calculate just how long it's going to take for your money to double. Just take the number 72 and divide it by the interest rate you hope to earn. That number gives you the approximate number of years it will take for your investment to double.
What is the Rule of 72 which amount will double faster? ›
If the interest per quarter is 4% (but interest is only compounded annually), then it will take (72 / 4) = 18 quarters or 4.5 years to double the principal. If the population of a nation increases at the rate of 1% per month, it will double in 72 months, or six years.
What are three things the Rule of 72 can determine? ›
dividing 72 by the interest rate will show you how long it will take your money to double. How many years it takes an invesment to double, How many years it takes debt to double, The interest rate must earn to double in a time frame, How many times debt or money will double in a period of time.
What is the 10-20 rule in finance? ›
The 20/10 rule of thumb is a budgeting technique that can be an effective way to keep your debt under control. It says your total debt shouldn't equal more than 20% of your annual income, and that your monthly debt payments shouldn't be more than 10% of your monthly income.
What are the flaws of Rule of 72? ›
Errors and Adjustments
The rule of 72 is only an approximation that is accurate for a range of interest rate (from 6% to 10%). Outside that range the error will vary from 2.4% to 14.0%. It turns out that for every three percentage points away from 8% the value 72 could be adjusted by 1.
What is an example of Rule of 72? ›
The Rule of 72 Calculation Example
Suppose an investment earns 6.0% each year. Q. Given the 6.0% rate of return, how many years will it take for the value of the investment to double? If we divide 72 by 6, we can calculate the number of years it would take for the investment to double.
What is the 50 30 20 rule? ›
The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings.
Try Flipping Things
Another way to double your $2,000 in 24 hours is by flipping items. This method involves buying items at a lower price and selling them for a profit. You can start by looking for items that are in high demand or have a high resale value. One popular option is to start a retail arbitrage business.
How to double 1000 dollars? ›
How Can I Double $1000? If your employer offers a dollar-for-dollar match contribution, you can double $1,000 by investing it in your 401(k). Other than that, there's no easy or risk-free way to double $1,000—you can invest the money in individual stocks, but there will be risks involved.
How do I double my money? ›
The classic approach of doubling your money by investing in a diversified portfolio of stocks and bonds is probably the one that applies to most investors. Investing to double your money can be done safely over several years, but for those who are impatient, there's more of a risk of losing most or all of their money.
What is the Rule of 72 Quizlet? ›
The number of years it takes for a certain amount to double in value is equal to 72 divided by its annual rate of interest.
What is the Rule of 72 calculator? ›
The Rule of 72 is a way to estimate how long it will take for an investment to double at a given interest rate, assuming a fixed annual rate of interest. You simply take 72 and divide it by the interest rate number. So, if the interest rate is 6%, you would divide 72 by 6 to get 12.
What is the Rule of 72 and 69? ›
Rules of 72, 69.3, and 69
The Rule of 72 states that by dividing 72 by the annual interest rate, you can estimate the number of years required for an investment to double. The Rule of 69.3 is a more accurate formula for higher interest rates and is calculated by dividing 69.3 by the interest rate.
