Bridget Sullivan Mermel CFP(R) CPA
Double Your Money: Use The Rule of 72 for Investment Returns
Using the rule of 72 makes it easy to figure out how much your money will grow over time. Most people think that it will grow pretty much in a straight line. However, that’s not how it works. We talk about a quick tool—the rule of 72—to help you understand how to estimate how much your money might grow. We discuss the key factors when using the Rule of 72—your initial investment, your return, and time. We also use examples of how to forecast how much your money might grow.
John: How do you double your money? We're going to show you how on this episode of Friends Talk Financial Planning. Hi, I'm John Scherer. And I run a fee-only financial planning practice in Middleton, Wisconsin.
Bridget: And I'm Bridget Sullivan Mermel. And I've got a fee-only financial planning practice in Chicago, Illinois. John, people want to grow their money and doubling it sounds great. I'd like to double my money. Why don’t you tell me how?
John: What's the secret sauce? Well, first of all, I'm going to talk about a little tool to help think about that, and then we'll talk about how to double money. And the tool I want to talk about is called “the rule of 72.” I was working with a client recently, we're talking about how much do their savings now, their 401K, what's it going to look like in 20 years in retirement; and a real quick sort of “thumb in the wind” way to look at that is this rule of 72, which says when the earnings that you get, your return, times the number of years, equals 72, that's when your money doubles. And what that means is, if you get 10% return each year, 10 times 7.2 is 72. So that means if you get 10%, every 7.2 years, your money doubles. Conversely, if you get 7.2%, return on your investments, 7.2 times 10, so every 10 years your money doubles. Right, so it's this little interplay and you can say “well, gee, what do you think your returns are going to be?” And then how many times does that go into 72? That's when your money doubles. So that's a really handy little tool to be able to estimate what future values might look like with what you've already done with your investing.
Bridget: Yeah, and John, before the show, when we were talking about this, I grabbed my calculator because 72 rang a bell for me. And I realized that, yes, eight times nine equals 72. So that matters for our calculation, too. Not my not keeping the multiplication tables in my brain, but that, again, good rule helps us with these rules of thumb. So why don't you tell us about that.
John: I just want to point out for the viewer that Bridget is a CPA and a CFP, like one of the smartest people I know. And it's like, okay yeah, we've got these calculators. We don't need to keep stuff in our brain, right? It's not about the math. It's about that tool of things.
Bridget: There’s no shame in that, no shame.
John: And so we bring out one of those two legs in this little equation we're talking about is return.
John: If you get 7.2%, I say seven, like seven to ten percent means your money doubles every seven to ten years, but you have to have it invested. If you've got that money in your bank account or your savings account and it's earning (most aren't earning even one percent), but if you get 1%, let's do our rule of 72. If I get one percent, one times 72 equals 72, right?
John: Then 72 years for my money to double, I’ll just get 2% and maybe some CDs. It's 36 years to double, so you have to have it invested. So one of the big components about doubling your money is just having it invested and getting some return, not getting 30%, but getting some return. Right?
Bridget: Right. And not having everything in stocks because you need some stuff. There's some investments, in safe investments, but having some in stocks that's if you want to grow your money, that's what you need to do. That's why people invest in the stock market. People that don't need to grow their money, they’ve got enough.
John: That's right.
Bridget: They invest in safe stuff. Yeah.
John: Yeah, it’s like when you've won the game. Then the other leg to that, right, so we have to get some return. Not it's not return doesn't drive anything. We don't need 36% return to double every two years.
John: The other thing is the time element. And it is just like time really is the secret sauce to this, as far as I'm concerned, is letting it grow and giving it that time. And it doesn't it doesn't have to be 72 years or 30, right? But you get decent returns, you get 7-8-9-10%, and your money is doubling every 7-8-9-10 years. And that's really significant, I think.
Bridget: Right. So if we used an example of somebody who is 40 and has 100,000 dollars, okay. We use if they are invested and getting 7-10% in return, that means by the time they're 50, they should have 200,000 dollars. By the time they're 60, they should have 400,000 dollars. And by the time they're 70, they should have 800,000 dollars. So it's doubled every…
John: Right, it's double and then triple…
Bridget: and maybe even more depending…
John: Yeah, that's right. And it's just this time, it’s this “get rich slowly” sort of thing that you hear people talk about it.
Bridget: But then if we had that same person with 100,000 dollars and they invested it, they could get one percent right now on their savings account, they would die without it…unless they live to be over 110.
John: They could live to 110, right, 112.
Bridget: It still wouldn't have doubled.
John: Right, right. So you've got to have those two factors. And to me, it's sort of like that time factor. It's sort of like built, like baking bread or something, you put all the other ingredients and yeah, it's all there, but that's like your one. And you sprinkle a little bit of yeast in there, and that's like the magic. Right. And it doesn't happen instantly. But that's the stuff that makes it grow over time.
Bridget: Yep. Like one of my clients said “you put your money in your 401K and don’t peak.”
John: That's right.
Bridget: We peek once a year just to do a little adjusting, but that's it, you know, just let it go, let it grow.
John: So to wrap things up here, we've got the rule of 72 right, the number of years times interest, when that equals 72, your money doubles. You can do sections…
Bridget: Times the rate of return returns.
John: It’s not exactly. Thanks for catching on. That rate of return times year equals 72. That's the formula for projecting doubling. And you've got to have some investment to get that return. And it's time, right, that's the magic sauce to this.
Bridget: Exactly. So let's wrap it up. Again, I'm Bridget Sullivan Mermel. And this is John Scherer, we’re Friends Talk Financial Planning. And if you subscribe, that would help us out a lot. So it helps us with YouTube, and it helps you get notified when we do new episodes.
John: And it helps other people find us if you find these things interesting. And speaking about finding people, both Bridget and I are members of the Alliance of Comprehensive Planners. So if you're interested in finding a planner that has the same approach to holistic and comprehensive financial planning, check out ACplanners.org. There are advisors all over the country. So with that, we'll wrap up. Thanks, Bridget.
Bridget: Thanks John.
At Sullivan Mermel, Inc., we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation. We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.