The Power of the Rule of 72

What is the Rule of 72?

The Rule of 72 is a simple formula that helps you estimate how long it will take for your investment to double. To use it, all you need to do is divide the number 72 by your expected annual rate of return. The resulting number gives you an estimate of how many years it will take for your money to double. For instance, if you have an investment that earns 6% annually, it would take approximately 12 years for your investment to double (72 / 6 = 12).

Why Understanding (and Applying) the Rule of 72 Matters

Understanding the Rule of 72 at the right time in life can profoundly influence your financial decisions. Of course, just knowing something doesn't do you much good if you don't use the knowledge to your advantage. And this is one investing tidbit where the timing of when you apply the lesson really matters!

The S&P 500 is an index of 500 of the largest companies in America and is commonly used as a way to gauge the health and performance of the overall market. Over the last 60+ years, the average annual return of the index is 11.75%. Our handy rule of 72 states that money invested in the index should double about every six years (72/11.75=6.12). If you start early enough for those doublings to work for you, it can change your life!

Consider a teenage worker who invests $2,000 of their earnings from a part-time job. From age 18 to age 67, that worker's money could double eight times using the market's average rate of return. $2k becomes $4k which becomes $8k, etc. That hundred hours spent flipping burgers to earn $2,000 in high school will become $512,000 by age 67! However, if that same person waits for six years and starts investing at age 24, their investment would only grow to $256,000. Wait another six years to age 30, when most of today's workers start saving for retirement, and that money would only have time to grow to $128,000. Waiting 12 years to apply the rule of 72 in your life could cost you 75% of your potential ultimate return. Ouch.

How to Make the Rule of 72 Work For You

• Get started. It's that simple. The earlier you start, the better. If you're unsure how to go about investing for the first time, spend some effort and educate yourself. Neither time nor the market will wait for you. You need to take action, and you want to do it now.

• Don't worry about timing the market. It's tempting to want to find the perfect time to invest, just before the market takes off! The problem? Nobody knows when that is! Some of the highest paid professional money managers in the world barely beat the S&P 500 index returns...sometimes. More commonly, they don't beat it. Turns out humans are lousy at predicting the future. The average return in the market includes years where the actual return has been significantly higher or lower (the best year in the last decade was 2019 with a return of 31.49%; the worst was 2022 with a return of -18.11%). Just trust that, over time, getting in at almost any time is far better than waiting.

• Don't stop. Not only will starting as early as possible give you the longest runway to take advantage of the rule of 72 and average market returns- doing so continually will smooth out market fluctuations even more. If you are consistently investing over your lifetime, the highs and the lows will matter even less.