The Rule of 72. Double Your Investment?

The rule of 72 has been around for a long time. In his book “The Richest Man in Babylon” by George S. Clason published in 1926, he uses this rule to illustrate the benefits of saving and investing. Fast forward to 1996, authors Thomas J. Stanley and William D. Danko published a personal finance book called “The Millionaire Next Door.” In their book, they use the rule of 72 to explain the power of compound interest in building wealth over time.

So what is the Rule of 72?

It is a simple mathematical shortcut that can be used to estimate how long it will take an investment to double in value at a given interest rate or rate of return.

If you divide the number 72 by the interest rate (or rate of return) you are projecting for a specific investment, the result will be the approximate number of years it will take for your investment to double in value.

Example:

If I’m investing $50,000 into a syndication deal as a passive investor and I’m projecting that deal will make me a 12% rate of return, I would take 72 divided by 12 which would give me the number 6. The rule of 72 is saying that it would take approximately 6 years to double my initial investment of $50,000.

If I keep investing every 6 years in a deal that makes me an average of a 12% return, I would reach millionaire status (starting with only $50,000) in less than 30 years. At 30 years my investment would be worth $1,600,000.

Year 6: $100,000

Year 12: $200,000

Year 18: $400,000

Year 24: $800,000

Year 30: $1,600,000

This rule is useful for quickly assessing the potential growth of an investment and for making comparisons between different investment opportunities.

However, the rule of 72 is just an approximation, and actual investment returns may vary significantly from what the rule of 72 predicts. Be sure not to make an investment decision solely based on this rule.