We recently mentioned the Rule of 72. Remember how we said it wasn’t etched in stone regarding accuracy? Here’s the tricky part. This rule is accurate primarily for interest rates between 6% and 10%. Here at Empowered Investor, we wholeheartedly expect our rate of return to fall far outside that range to the high side, so what is one to do?
The answer is use a higher number than 72 when performing the calculation. So simple, but how do you arrive at a number to use? Surely, grabbing a random number from your head is not the preferred method. Correct. There is a better way. For every three percentage points the rate of return deviates from 8%, add one number to 72. For example, if you’re trying to calculate 20%, you can quickly see that the difference between 20 and 8 is 12. Divide that by 3 and you get 4. Add 4 to 72 and you get 76. This is now the number you use in the calculation to find out how many years it would take your investment to double at a 20% annual rate of return.
Did you follow all that? It’s a lot of numbers. If you’re interested in the subject and want to dig into it a bit more, check out the Wikipedia Entry.
