Ever wanted to know how long it takes to double your investment? With the Rule of 72, you can do just that, using a formula to see the length of time it’ll take to double your initial investment. But how does the Rule of 72 work, and what does it have to do with life insurance? We’ve got all the details in this guide. Here’s your cheat sheet to the Rule of 72 and how to make it work.
What is the rule of 72?
The Rule of 72 is a formula used to determine how long an investment takes to double, given a fixed annual rate of interest. You simply divide 72 by the annual rate of return, and, hey presto, you’ve got an indication of the length of time it will take to double your investment.
It’s a popular method with investors, as trying to forecast your rate of return can otherwise be tricky. With the Rule of 72, however, you can be more confident about potential returns and how long you can expect to wait before they become tangible assets.
Don’t just take our word for it, though. Here’s Tom Mathews and Steve Siebold from their book, “How Money Works”: “The Rule of 72 can give you an idea of how many doubles you’ll get in your lifetime. With more time, a lower interest rate may give you enough to nail your goals. With less time, you may need a higher interest rate.”
How does it work?
The calculation for the Rule of 72 is pretty straightforward. Divide 72 by the interest rate to see how many years it’ll take to double your return. For example, an interest rate of 3% used for the Rule of 72 would look a little something like this:
That means you can expect to wait 24 years for your investment to double if it’s in an account where the interest rate is 3%. If you’re using something like a standard savings account, where interest rates tend to be around 0.9%, you can expect to wait 800 years. You better start binge-watching Netflix to pass the time.
The Rule of 72 in action
Relying on a standard savings account might not be the best way to maximize returns. Most people tend to keep their money in high yield savings accounts or a certificate of deposit, both of which offer higher interest rates.
Then there’s the stock market, employer-sponsored 401(k), a traditional Roth IRA, or an individual brokerage account. All of these investment types can help you grow your money, and using the Rule of 72 is a good way to determine how much you can make.
The Rule of 72 also works for credit cards, car debts, loans, and even home mortgages. You can use it to see how many years it’ll take your money to double for someone else. If you’re not a sadomasochist, however, perhaps it’s best to stick to working out the numbers for your own personal gain.
Life insurance and the Rule of 72
When you take out a permanent life insurance policy, all of a sudden, you’ve got yourself a savings account. That’s because perm coverage comes with something called “cash value,” which lets you build wealth while you’re still alive.
Essentially, you pay into two pots: the death benefit and cash value. Both of these accrue with each monthly payment, and you can access the cash value later on in life. Even better, your wealth tends to grow on an average of 6%-8% annually with permanent life insurance.
Let’s be rather more modest and take that 6% figure. Using the Rule of 72 and dividing 72 by 6, we get 12. That means you can double your investment in just 12 years if your cash value grows at a rate of 6%. Bump it up to 8%, and you’re doubling your investment in just 9 years.
So if you took out a permanent life insurance policy in your 20s, you could double your investment every 9 years at an annual growth rate of 8%. In 40 years, you could more than quadruple your investment. Suddenly, you’ve got yourself a nice little nest egg for retirement.
Getting a permanent life insurance policy allows you to both look after your family after you pass and grow wealth while you’re still alive. And with the Rule of 72, you calculate impressive returns for your investment in a perm policy.
In conclusion: The Rule of 72
Using the Rule of 72 is a smart way to get a better indication of how much you can earn over a specific period of time. While you need to factor in things like changing interest rates, it still provides you with a foundation and pretty solid numbers. You can remove much of the guesswork and feel more confident about your investments.