The rule of 72 is a simple tool to calculate how long it takes to double your money. Your money will double in value if the product of multiplying the interest rate by time equals 72. The formula is Interest x Time = 72. So given a 10% annual investment rate it will take 7.2 years to double your money (10 percent x 7.2 years = 72). If the annual interest rate were 24% it would only take three years to double your investment (24 percent x 3 years = 72). The S&P 500 is an index of large companies like Microsoft and Johnson & Johnson. Since the summer of 2009, at the bottom of the recession, the S&P500 index has grown threefold.
A single dollar invested in 2009 is now worth 3 dollars, which is about a 24% annual increase. Through the power of the multiplier or compounding effect, a 24% annual investment rate would allow a single dollar to double in just 3 years, double again in 6 years, and in 60 years that single dollar would be worth over a million dollars.
Investing in a business has some additional risks over investing in the S&P 500, and as such should have a greater return than the general stock market. The S&P 500 has had an average long-term growth rate since its inception of about 12%, so a hurdle rate of 18% to 24% to invest in a private business is not entirely unrealistic. Investing in a small business is just like investing in a big publicly traded business, except it carries more liquidity or marketability risk.
How can you use the rule of 72 to quickly compare investment options?
