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How Understanding the ‘Rule of 72’ Helps You Make Personal Finance Decisions

Though everybody wants their money to grow, few people understand the best way to make that happen. It’s all about where you choose to put your money and the rate of growth you’re able to achieve over a period of time. When you’re trying to figure out how compound interest works, the “rule of 72” is one of the most helpful tools available. 

What is the Rule of 72?

The Rule of 72 is a helpful, easy-to-understand formula that predicts how many years it takes money to double based on a specific rate of return. You can use it to make decisions about where to put your money based on how much time you have for it to grow and what your risk tolerance is. If your goal is to have twice as much when you finish as when you start, you can identify the interest rate you need based on how much time you have. All you need is the interest rate to complete the calculation, which is based on the following formula:

72 / interest rate = years to double

With this simple calculation, you can look at the interest rate offered by various savings tools or anticipated growth of investments and see exactly how long it will take for your money to double. Here’s how different rates of interest impact the time needed to double:

At 1%, it will take 72 years for your money to double (72 / 1 = 72)
At 3%, it will take 24 years for your money to double (72 / 3 = 24)

At 6%, it will take 12 years for your money to double (72 / 6 = 12)
At 9%, it will take 8 years for your money to double (72 / 9 = 8)
At 12%, it will take 6 years for your money to double (72 / 12 = 6)

This list provides as clear a picture as anybody could possibly need of the difference between parking your money in a super-safe, standard savings account that pays 0.09%, and investing in a riskier investment such as the stock market, where the average annualized total return for the S&P 500 index has been just shy of 10% over the last 90 years. It’s a 790-year difference when it comes to doubling!

The same formula can be very useful when it comes to taking out loans. Whether you are looking for a new car, a mortgage for a home purchase, or paying interest on your credit card, if you divide 72 by your interest rate, you’ll see exactly how fast the lender (or credit card company) is doubling the money that you’re paying them. It’s a helpful guide to steering clear of usury rates by loan shopping and understanding the advantages of refinancing.

As straightforward as the Rule of 72 is, getting your personal finances in order can be a complicated task. For help with navigating complex decisions, contact our office today to set up a time to discuss your specific needs and goals.

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Frequently Asked Questions

You can prepare your taxes yourself, especially if your business is simple.

But once you have contractors, employees, business loans, equipment purchases, mileage, mixed expenses, or growing revenue, things get more complex. At that point, tax preparation becomes a way to make sure your business is reported correctly, your deductions are handled properly, and your records can support what you file.

Send anything that shows what your business earned, spent, bought, paid, borrowed, or changed during the year.

That usually means your income records, bank statements, credit card statements, payroll reports, contractor payments, loan documents, mileage records, and prior-year tax return. Also tell me about anything unusual, such as buying a vehicle, hiring someone, opening a new location, or taking out a business loan.

Messy books can slow things down. If expenses are in the wrong categories, transactions are missing, or personal and business spending are mixed together, your tax return may not show the right profit. We may need to clean things up before filing, so your return is accurate and easier to support.

Possibly, if it was truly for your business and you have proof.

Still, it is much better to avoid this when you can. A separate business bank account and business credit card make everything cleaner. They save time, reduce confusion, and make your records much easier to defend if anyone ever asks questions.

Most small business owners can deduct ordinary business expenses like software, advertising, supplies, insurance, rent, payroll, contractor payments, professional fees, travel, and some vehicle costs.

The question I usually ask is simple. Was this expense clearly for the business? If yes, we can look at how it should be handled. Personal expenses should stay personal.

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