The rule of 72 is a rule that can answer you the question: How many years will my money need to double for a given interest rate?
It closes the gap between an interest rate and what it means in real life.
Here is the rule of 72:
t = 72 / Interest Rate in percent
So how long would your money need to double with an interest rate of 7%? (Average historical inflation-adjusted stock market return)
72 / 7 = 10 years
Or quadruple it within 20 years. That’s what’s in for you. That’s why, even 10 or 15% of your disposable income saved can make a huge difference over time.
This is the sole reason early retirement is possible. You just have to save a lot of money and invest it in stocks. Or save only a few bucks and let them sit a lot longer.
Compounding can also work against you.
Say you have a credit card and it charges a 15% interest rate. How fast will the amount you owe be doubled?
72 / 15 = 5 years
This is insanity as you see. Even if you are required to pay off some of the principal every month.
So every time you hear an interest rate I want you to apply the rule. It will translate it into something a little more meaningful for you.
Use it to help you with financial decisions. Choose wisely.