The Rule of 72 is a simple yet powerful concept that can help anyone understand the power of compound interest and make better financial decisions. This rule is often used in the world of investing and finance to estimate how long it will take for an investment to double in value, given a fixed annual rate of return.
How Long to Double Your Wealth
The Rule of 72 is quite easy to understand and calculate. It states that you can approximate the number of years it will take for an investment to double by dividing 72 by the annual rate of return. For example, if you have an investment with an annual rate of return of 6%, you can estimate that it will take about 12 years for that investment to double (72 / 6 = 12).
The Rule of 72 is a helpful tool for investors to gauge the potential growth of their investments over time. By using this rule, investors can determine how different rates of return can impact the growth of their money and make more informed decisions about where to invest their funds.
Additionally, the Rule of 72 can also help individuals understand the power of compound interest. Compound interest is the practice of reinvesting the interest earned on an investment, which can lead to exponential growth over time. By using the Rule of 72, investors can see how compound interest can work in their favor and help them achieve their financial goals more quickly.
How Long to Lose Half Your Wealth
On the other hand, if your investments are declining in value, the rule of 72 can help you understand when your investments will become half as valuable.
Let’s suppose your investments are earning a 4% return. Also suppose inflation is running around 6%.
Said another way, prices are going up at a rate of 6% while your investment’s buying power only increases by 4%.
This means that your investments are losing around 2% per year in their buying power.
Dividing 72 by 2 yields 36. It will take about 36 years for your investments to lose half of their value to buy goods and services.
Wise Investing
Wise investors will examine how inflation is affecting their investments. If the rate of return on your investments is below the inflation rate, you are losing wealth, or buying power.
Start looking for ways to shift some of your assests to investment options with rates of return that exceed the inflation rate.
Of course, we suggest real estate. Fractional investing with Roots is one way to improve your rate of return. You’ll be more secure and receive an additional $25 added to your first investment.