Have you ever wondered how many years it would take for your investment portfolio to double? Or how fast your credit card debt would grow if you stopped making repayments?

Well, you can estimate both with the Rule of 72!

The Rule of 72 is a popular calculation that helps people quickly approximate the number of years it takes to double their money, using the expected rate of return (p.a.)

While there are plenty of online calculators to help you do this, sometimes it’s handy to have a quick mental calculation you can use instead (party trick?)

How does it work?

The formula for the Rule of 72 is this:

Years to double = 72 / Expected annual rate of return

It’s important to note that this formula only applies to compound interest (not simple interest) scenarios.  

So, if your investment portfolio has a 6% annual return, it would take 12 years (72/6) for the value of your investment portfolio to double - assuming you make no extra investments.

Pretty nifty.

The rule also works when you’re trying to figure out debt growth.

So if you have a credit card with a 20% interest rate and you stopped making repayments on your card, it would take about 3.6 years (72/20) for your debt to double.

Here are three more ways you could apply the Rule of 72:  

• Time it takes for inflation to reduce your money’s value (purchasing power)
• Time it takes for your property to double in value
• Time it takes for your business revenue to double  

Let’s get practical

Now you have this awesome information, what do you do with it?

Being able to understand opportunities, investments and financial decisions from a time perspective can help you weigh up your options more tangibly.

For example, a 7% interest rate might not mean much to you in a day to day sense, but understanding that this roughly equates to a 12 year window of doubling your money can make things feel more real.

So you see, the Rule of 72 can help with decision making and long term financial goal setting.

Rule of 72 limitations

At the end of the day, the Rule of 72 is an approximation… not a precise formula.

Some experts say it works best for annual rates between 6-10% and can be less accurate outside this range.

The Rule of 72 is also heavily simplified and doesn’t factor in any potential taxes, fees, inflation, or market volatility that might be impacting the growth of your money.

So where you’re looking for a quick calculation to make more informed decisions, the Rule of 72 can be a super powerful tool. But if you’re looking for accuracy, speak to a professional and run the numbers on a spreadsheet!

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Disclaimer: All information contained in the Flux app, www.flux.finance, www.joinflux.com, app.flux.finance and any podcast of Flux Media Pty Ltd (ABN 27 639 804 345) is for education and entertainment purposes only. It is not intended as a substitute for professional financial, legal or tax advice. While we do our best to provide accurate information on the podcast, we accept no responsibility for any inaccuracies that may be communicated.

Flux does not operate under an Australian financial services licence and relies on the exemption available under section 911A(2)(eb) of the Corporations Act 2001 (Cth) and ASIC RG 36.66. Flux Technologies Pty Ltd provides general advice on credit products under our own Australian Credit Licence No. 530103.