What is the rule of 72 and why is it relevant to you?
The rule of 72 is one of the simplest financial formulas in existence. It seeks to answer the following question: “If I have $1; how long will it take to be come $2?” Seems like a simple enough question right? But the question goes much deeper than that: How long will it take for $1 to become $2 without you having to do anything? Seriously, you deposit a dollar, forget it exists and when you want your dollar back; you get $2. Seems great right?
So let’s get to the math and then we will apply real life concepts to see it in practice. According to https://www.wellsfargo.com/savings-cds/consumer-account-rates/ interest rates on standard savings account are currently yielding 0.03%. So the math goes like this 72/0.03 =2,400. We are taking the base unit of 72 and dividing by the interest rate. So if you deposit money into this specific savings account (at this point in time); it will take 2,400 years for your $1 to become $2. On the flip side; if you were to invest in Anally (NYSE:NLY), which currently has a 12.01% dividend yield; your $1 would become $2 in 6 years (72/12 = 6).
Note that these are examples I am using for this exercise. This is not a recommendation to buy or sell any security and I currently do not hold nor do I plan to acquire positions in (NYSE:NLY).
So, as you can hopefully see; the rule of 72 should give you a quick estimate on how long it will take to double your money from an investment. This will be one of your many tools in your financial tool box to help guide your financial future. Knowing how long it will take for your money to double is an important first step to financial freedom.