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.

]]>Damn, that’s pretty good.

]]>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

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.

]]>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.

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