## Sunday, August 6, 2017

### Double My Money!

I was talking with my mother recently, and the conversation at hand was money and our investments.  She was in the process of doing a little bit of financial housekeeping, and make some decisions in the process.  What I would like to share with you, is a little trick that she was able to use to give her some clarity on a few of the decisions she was facing.  This trick is called The Rule of 72.

The Rule of 72

Let me start by saying that I did NOT invent the Rule of 72, but I do use it for my own quick figuring.  The Rule of 72 is a quick-math method of being able to figure out how long it will take your money to double.  The exact formula for the exact calculation is pretty complex, and requires a calculator.  This will easily get you in the ballpark using simple mental math.

All you have to do is take 72 and divide by the compound annual rate of interest.  The answer is the number of years it will take for your money to double.

72/rate = # of years

For example, I have a retirement account with a guaranteed 7%.  Using the rule of 72, I know that it will take 10.28 years for my money to double (about 10 years and 3 months).  I know this because 72/7=10.28 roughly.

Why do I want to know when my money will double?

This information is pretty valuable when trying to decide where to invest your money. Let's use that retirement account of mine as an example.  I've been looking a some of the other funds that are options in my retirement plan, and am considering moving into one of those instead.  The rate isn't guaranteed, but I'm seeing that they have a track record of about 10% over the last five years.  While there's no certainty that it will stay at 10%, if it does, my money will double in 7.2 years (72/10=7.2).  On the other end of the spectrum, I have a savings account at my local credit union.  I use that account for my emergency savings, but not at all for investing.  It hasn't made more than about 1% in years.  At 1%, it would take 72 years to double my money.  Hmmm... Not sure I want to wait that long.  So, that's why I only have my emergency savings in that account.

So, while you can get more exact using a more precise formula and a calculator, The Rule of 72 should also do the trick!