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Remember the rule of 72? You can use this rule-of-thumb to estimate how long it will take to double your money under various scenarios. To do this, you simply divide the annual rate of return into 72 to determine how many years it will take to double your money.
For example, if you assume an average 8% return on your Roth IRA, its value should double every nine years. (This doesn’t consider additional contributions, of course. And for a variety of reasons — particularly market fluctuations — it’s not a precise tool.)
You can run the numbers the other direction, too. What sort of annual return do you need in order to double your money every five years? 72 ÷ 5 = 14.4%.
JLP at All Financial Matters points out something obvious that had never occurred to me before: to estimate how long it will take for your money to quadruple, you can use the rule of 144. Less obvious is the rule of 114, which allows you to estimate the time needed to triple your money.
(And by extrapolation, then, we can devise a new “rule of 42″, which is the amount of time necessary for our money to increase 50%.)
I’ve never mentioned here that I’m a stats geek. It’s true. I love stuff like this.
[All Financial Matters: The rule of 72, 114, and 144]
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May 16th, 2007 at 6:26 pm
Glad to know I’m not the only one who loves stats. How about spreadsheets? I love me some spreadsheets…
May 16th, 2007 at 7:52 pm
The most important part is that the number 42 comes into play. It is, after all, the answer.
May 16th, 2007 at 10:58 pm
lol Bob
And these rules are great for more than just figuring out how long it will take for your money to double.
I recently saw a presentation where the presenter said his company went up 300 percent since 1990! Sounds super, right? Well, do the math. If 144 divided by your rate of interest will give you the time required to quadruple your money, then 144 divided by the amount of years in which your money quadrupled should give you your rate of return. 144 divided by 17 is 8.47. Good interest rate but not the incredible super duper rate that presenter was making it out to be.
GJ
http://www.60in3.com
May 17th, 2007 at 5:33 am
Here’s an approximation I came up with: the Rule of 300. For every $300 you save, you will have a lifetime passive income of about $1 per month.
Explanation: assume return of 4% above inflation. (For example, 7% return, 3% inflation). $300 * 4% = $12 / 12 months = $1 / month
It’s unfortunate to have to hardcore assumptions about return and inflation in my estimate, but I think they’re reasonable. If you think you can make 5% more than inflation it’s about $250 for every $1/month of investment income.
May 17th, 2007 at 5:45 am
Here are some more approximations I found interesting:
Starting with nothing, if I save 50% of my income and make 5% above inflation, how long until my passive income is:
- equal to half what I’m not saving: 8 years
- equal to what I’m not saving: 14 years
- equal to twice what I’m not saving: 22 years
Same question, this time saving 33%:
- half what I’m not saving: 14 years
- equal to what I’m not saving: 22 years
- twice what I’m not saving: 32 years
Same question, this time saving 20%:
- half what I’m not saving: 22 years
- equal to what I’m not saving: 32 years
- twice what I’m not saving: 44 years
May 19th, 2007 at 12:51 am
I tried to break this rule of 72 with a 1% growth rate. 1.01 to the power of 72 is 2.047.
Damn, that’s pretty good.
May 21st, 2007 at 7:43 pm
[...] The Rule of 72 (and Friends) ? Get Rich Slowly The Rule of 72 (and Friends) (tags: money interest ruleof72) [...]
October 17th, 2007 at 9:40 pm
[...] J.D. Roth of Get Rich admits he loves stuff like the rule of 72 because he is a stats geek [...]
January 17th, 2008 at 8:06 am
‘Rule of 120′
People often use the ‘Rule of 72′ to figure how many years it takes to double a fixed investment (Divide 72 by the interest rate to find number of years to double the original investment).
But most of us, through IRA or 401Ks, invest periodically, say every year, not just once. I’ve come up with the ‘Rule of 120′. It assumes you invest the same amount every year at a fixed interest rate and lets you know how many years it would take to double your total investment.
For example, stuff $1,000 a year into your mattress for 30 years and you’ll have $30,000. Invest $1,000/yr at 4% for 30 years (120/4) and you’ll have about $60,000, double the total amount you invested. Or you might want to invest over 20 years and can determine that you’d need a constant rate of 6% (120/20) to double your total investment.
The ‘Rule of 120′ is fairly accurate, with about a 2% to 4% error for different interest rates or number of years. A ‘Rule of 124′ would be even more accurate but is awkward to divide by most simple whole numbers.
Enjoy.