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Rule of 72

Scott Maxwell - Thursday, January 31, 2013

Rule of 72

Remember the old “Rule of 72”? It tells us how long it will take to double our money. It works like this:

Take your current rate of return, divide it into 72 and you’ll know how many years it takes to get a double on your investment or savings account at that rate. Let’s assume we have an investment that we expect to earn 8% annually over time. We divide 72 by 8 and voila, we now know it takes 9 years to double our money. This is a great concept for young savers/investors because of the way compound interest works. We start with $1,000 and invest it to make 8% per year and in 9 years our $1,000 becomes $2,000. In 9 more years (18 total) our $2,000 becomes $4,000. In 9 more (27 total) our 4 becomes 8. In 9 more (36 total) our 8 becomes 16 and in 9 more (45 total) our $1,000 initial investment has grown to $32,000!

45 years is how long someone could expect to work if they start working in their early 20’s. So that $1,000 might grow to $32,000. And imagine if they don’t need the money for another 9 years. Their money will double again for a grand total of $64,000!

This, of course, is not meant to be illustrative of any particular investment or savings program, rather it is what would happen mathematically given a particular average rate of return over time.

We’ve worked with a lot of grandparents who are passionate about helping their grandchildren put some money in a Roth IRA. They understood the Rule of 72 and realized that a modest deposit while their grandkids are young might grow into a sizable amount when their hair is gray. With a Roth IRA that entire sum could potentially be withdrawn tax free.

Now that’s good math!

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