In such a scenario, it will take your money 12 years to double in value. If you are receiving 10 percent interest on an investment but inflation is running at 4 percent, then your real rate of return is 6 percent. The real rate of return is the key to how quickly the value of your investment will grow. Assuming an inflation rate of 4.5 percent, in 16 years your $10,000 will have lost half of its value. Let’s say you decide not to invest your $10,000 but hide it under your mattress instead. The “Rule of 72” can also highlight the damage that inflation can do to your money. While compound interest is a great ally to an investor, inflation is one of the greatest enemies. It is most accurate for hypothetical rates between 5 and 20 percent. The “Rule of 72” is a rule of thumb that gives approximate results. You divide 72 by 10 percent to get the time it takes for your money to double. You divide 72 by the interest rate to get the answer.įor example, if you invest $10,000 at 10 percent compound interest, then the “Rule of 72” states that in 7.2 years you will have $20,000. In other words, you receive interest on the interest.īut just how quickly does your money grow? The easiest way to work that out is by using what's known as the “Rule of 72.” Quite simply, the “Rule of 72” enables you to determine how long it will take for the money you've invested on a compound interest basis to double.
With compound interest, the return that you receive on your initial investment is automatically reinvested. With simple interest, interest is paid just on the principal.
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Whether your financial portfolio consists solely of a deposit account at your local bank or a series of highly leveraged investments, your rate of return is dramatically improved by the compounding factor. Printed from: How Long Will It Take to Double My Money?īefore making any investment decision, one of the key elements you face is working out the real rate of return on your investment.Ĭompound interest is critical to investment growth.
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