Limerick financial advisor outlines how to double your money using the rule of 72

IF you ever wanted to know how long it would take before you doubled your money in an investment or in your pension fund, it might prove difficult. Where would you even begin to try and figure this out and why should it even matter?
I will get to the why in a moment but figuring out how long it will take is actually not that difficult to work out.
It can be done by referring to what’s known in the financial world as the Rule of 72.
And this rule is a very simple and valuable mental math shortcut that will show you how long it will take a sum of money to double in value or indeed halve if things go the other way.
To find out the answer, all you have to do is divide 72 by the interest rate you are in receipt of or earning each year.
So, if for example if you are earning 3% every year, just divide 72 by 3 and the answer is 24.

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Which means that if you invest a lump sum of say €20,000 into an account that returns 3% every year, it will take 24 years before the balance in your account becomes €40,000.
You can also use the rule of 72 to find out what rate of interest you’d need to earn if you wanted to double your money within a specific time period.
For example if you wanted your money to double every 10 years, and you didn’t know what rate of interest you’d need to achieve this, well now you do, because all you have to do in this instance is divide 72 by 10, and you’ll get 7.2.
And that’s the rate of interest i.e. 7.2%, you’d need to earn every year.
So, why is this rule useful to know?
I think it’s helpful for a number of reasons.
Then first is that it helps with identifying the type of account you need to invest in and figuring out what risk to your capital you are willing to take.
For example, if you wanted to have your capital 100% guaranteed and because of this the rate of interest your savings was earning was 1%, then your money would double in value in 72 years’ time.
And maybe your capital is more important to you than seeing your savings double in value and if that’s the case, then fine.
But if you didn’t want to wait 72 years, and you wanted your capital to double every decade then we know you need to be earning 7.2% per year and that will almost certainly mean that you need to invest in accounts that carry an element of risk to the capital.
And for me the rule of 72 is a useful way of translating something we don’t really know how to connect with i.e. interest rates and return on investments into something we can relate more to and that is time and how long it takes for our money to double in value.
And for this very reason, I use this rule when I talk to groups about pension planning because it is much more effective than talking about different types of low and high risk funds or what interest rate you are getting each year, because both are linked but the rule of 72 makes much more sense of them.
For example if I was to ask you whether you thought the difference between 5% or 7% was a big deal or not, you might not know the answer and because there’s only a 2% difference, you might think that you are not losing out much by not getting that extra 2%.
But think again, because what if I was able to tell you very quickly that 2% when put into a compounding formula makes a huge difference on how quickly your money grows.
Let me explain.
The rule of 72 we know tells us that a return of 7% means your money will double in 10.3 years’ time. And a 5% return means your investment doubles every 14.4 years.
If you are 30 years old and you earn 7% per year, you will double your money every 10 years instead of every 14 years and that will make a huge difference in how much money you have at age 60.
Investing and achieving an annual return of 7% has the opportunity to have 3 doubles i.e. it will double 3 times, once per decade.

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The person who is investing at 5% on the other hand who has the same 30 years of investing only has the possibility of doubling their money 2.08 times.
If you think about this, and let’s say you have €50,000 today, doubled 3 times will leave you with €400,000 at 60 after the third doubling.
But if it doubled 2.08 times and lets round that down to 2 times, at 60 you are left with €200,000.
So, the difference of 2% over that length of time is €200,000 and that seems a much bigger and more real difference than little ole 2%.
That’s why it matters a lot when it comes to investing and selecting the right account and fund to invest into, particularly when it comes to your pension account. Investing in a fund that has a high weighting in equities and therefore a higher probability of achieving higher returns (high risk) something moving towards 7% or 8% or 9% per annum is something you should be doing particularly when you are young enough to take that risk, rather than investing in cash or bonds (low risk but very low return) because your return will be much smaller.
Of course compounding can work against you as well.
We can use the rule of 72 to look at the impact interest rates have on certain expenses, debt and the value of money.
Inflation is a good example of this and the rule is a great way of showing you how this is the case.
If inflation was running at 2%, you will lose half the value of your money in 36 years.
But if inflation rose to 3%, then half of its value is gone in 24 years. That’s over a decade of a difference for a 1% increase so it’s important to be aware of and know what the inflation rate is.
We can use the rule of 72 to measure the increases in other expenses like the cost of health care. If it is going up for example by 8% year on year, in 9 years the cost of paying for it will have doubled so that’s what % increases really mean to us.
And if you have a credit card and the rate of interest charged to it is 18%, the amount you owe will double in just 4 years’ time.
So, if you are wondering how long it will take to find out how long it will take for an expense or debt to double or an amount invested will take to double, just divide the number 72 by the interest rate and that is your answer. Hopefully that will get your head around the difference in %’s, how you make decisions, how you plan for future expenses, what you invest in etc. which can be difficult for us to make sense of. .
You will now be able to create an accurate, easy to calculate and meaningful way of interpreting expenses and rates and how they can impact your finances, good and bad and what decisions you make can be aided by knowing the rule of 72.

Liam Croke is MD of Harmonics Financial Ltd, based in Plassey. He can be contacted at liam@harmonics.ie or www.harmonics.ie