I’ve told you I like shortcuts, right?

Well, that’s pretty much what the rule of 72 is, it’s a shortcut.

Specifically, it’s a shortcut to working out how long it will take to double your money for any given investment.

Question: If you invested £10,000 at 12% p.a. how long would it take for you to double your money and for that £10,000 to become £20,000?
Answer: 6 years.

How about if it was invested at 6% p.a.? 12 years.

and at 3% per annum, your money would double in 24 years.

The easy way to very quickly understand this is by using the Rule of 72. Just divide 72 by the interest rate per annum and that will tell you how long it will take for your money to double.

If theses figures (i.e. how quickly your money doubles) surprise you, then that is the beauty of compound interest. Put the numbers into a spreadsheet and you will see the effect for yourself.

If you are cynical and saying ‘yeah, but who gets 12% p.a. interest?’, I do – and more on some platforms. I can tell you more about these later but that’s not the point of this article – even at 6% interest, I hope you see that your money would double quicker than you may think.

The point of this is to be equipped with the knowledge and have a very handy tool (at least I find it very handy) that you can use to instantly tell you something useful (if you agree that doubling your money is useful – I certainly think it can be).

Modern World Problems

So in my view, some of the problems with the world we live in these days are to do with impatience and intolerance. We live in a world where things happen much faster than ever before, things can be manufactured much faster than ever before, information is delivered much faster than ever before, post is delivered much faster than ever before, people get from a to b much faster than ever before…

You get the idea.

The upshot of all of this is that people expect results much faster than ever before.

That’s OK to an extent but it doesn’t exactly encourage a solid approach to making the most out of compound interest. There are ways that we can look at short term returns but today we’re exploring compound interest which requires a degree of patience & understanding so let’s screw up those modern world problems into a tight little ball and bury them, at least for the time being.

A Closer Look at Compound Interest at 6%

Pretty powerful stuff.

Imagine you had £100 and you earned just 6% on that £100 per year – that’s easy to work out – it’s £6 per year.

What do you earn in 12 years? here’s a clue – it’s not £72 (12×6). It’s a lot better than that, because the interest is compounded, you actually earn £100 – i.e. you double your money in 12 years – and it would double again in another 12 years.

This is because in year 2 you are not earning 6% of £100, you are earning 6% of £106 (the interest earned each year is added to the capital).

Obviously you can plug in any interest rate you like here to test the rule of 72 and see how the money would grow, but as 6% should be fairly achievable for most people who care to look into it, that’s the rate I’ve used for the example.

Final Thoughts

Well, that’s it really – just a little rule I’ve found handy from time to time that I thought worth sharing, nothing more.

If you want to know more about this stuff or interest rates, shout up in the comments below & in any case I might write something about various investment ptions at some stage (though not sure how uch I really want to as I like the articles here to stay global and I’m pretty UK-centric when it comes to specific examples of this stuff, plus things change, I wouldn’t recommend the same platforms today as I would 5 years ago, but I’ll give it some thought ;-)).