For young workers, a paycheck and maybe even health insurance benefits are the primary reasons to get a job. But that paycheck will only take you so far if you aren’t smart about utilizing it to build more capital for the future.
Of course, investing is such a broad term that involves its own set of vocabulary that many of us simply aren’t taught in high school or college.
However, even if you’re new to the savings and investing game, it’s important that you know about how to double your money with the Rule of 72.
Start investing early! The rule of 72 works better and better the sooner you start.
— Gage Bishop (@GageBishop9) February 10, 2020
So what exactly is the magic behind the number 72?
By dividing the number 72 by the interest rate of your return, you can calculate the number of years it will take to double your investment.
This applies to all your financial accounts, including savings, money market accounts, index and mutual funds.
Lifehacker writer Nicole Dieker utilized her personal financial figures to illustrate just how the formula works.
Dieker’s Capital One 360 savings account earns an interest rate of 0.63 percent. By dividing 72 by that paltry figure, it would take Dieker 114 years to double her money.
At least her Vanguard investment accounts are in better shape, as they earn an average rate of return of 10.3 percent. In that case, it would only take Dieker seven years to double her money.
What is an underrated piece of financial knowledge that you often use?
Mine: Rule of 72
If you divide 72 by an annual rate of return, you can get how many years it takes for an investment to double.
72/9% = 8 years to double
What about you?
— Ryan Reeves (@investing_city) May 29, 2019
Financial tips like the Rule of 72 can be critically helpful for novice investors like myself. Delving into the world of stocks, mutual funds, cryptocurrency and everything in between can be daunting for those without a strong financial background.
When it comes to the Rule of 72, percentage points matter. So take the time and do your homework on potential investments before you fully commit.