Considering the 'Rule of 72'
Financial Snapshot
By Jon Kagan, CFP®, Gulf Winds Wealth Strategies

"How long will it take my investment to double?" This is a common question many may have concerning their investments and think a calculator is needed to provide an answer. But a calculator may not be needed at all. The tool to use is called the "Rule of 72" and best of all, it is simple and free. This is how it works. If an individual has an investment they think will grow at an assumed rate of return per year, then simply dividing that rate of return into 72 will provide a rough estimate of the number of years it will take for the investment to double in size.

For example, let's assume an investment is assumed to grow at an average rate of return of 6 percent each year. Simply dividing six into 72 will give a rough estimate that it will take 12 years for this investment to double (72 ¸ 6 = 12). This formula assumes a fixed annual rate of return and the reinvestment of all earnings. Keep in mind that very few investments offer a guaranteed rate of return and that an investment's past performance does not guarantee future performance.

The rule of 72 may also be used to show the negative power of inflation. This may be an especially handy tool to those individuals in their retirement's years and also for those approaching the retirement decision. Using this tool, an individual can estimate the number of years it will take for his or her cost of living to double. Or put another way, how long before an individual's purchasing power is cut in half.

For example, let's assume an individual is retired and forecasts an inflation rate of 5 percent per year. An inflation rate, in general terms, is the rate of increase in the prices of goods and services individuals purchase over time. Forecasting an inflation rate of 5 percent means the individual is assuming the prices of the goods and services he or she will purchase in the future will increase at a rate of five percent per year. Using the rule of 72, simply dividing five into 72 will provide a rough estimate that the individual's cost of living will double in 14 to 15 years (72 ¸ 5 = 14.4).

Of course, this article is no substitute for a careful consideration of all of the advantages and disadvantages of an investment strategy to meet your goals. Before implementing a significant investment strategy consider consulting your financial advisor.