When putting together a savings plan, you may be wondering how long it’ll take for your savings to grow at a specific interest rate. Using the Rule of 72 is a simple way to determine how your savings will increase over time and how long it’ll take for your money to double. So, how does it work?
To use the Rule of 72, your savings must accrue compound interest. Take the interest rate and divide it by 72 to find out how many years it’ll take for you to double your investment at that rate. For example, if you have $1,000 and it accrues 4% interest, you’ll take 72/4 to get 18. In this scenario, it would take 18 years for your $1,000 to double at that interest rate.
By dividing any interest rate by 72, you’ll know exactly how long it’ll take for your money to double so you can choose the appropriate savings vehicles for you and your goals. Keep in mind that this formula only works with fixed interest rates. The Rule of 72 can’t be used with interest rates that fluctuate over time.
The formula demonstrates how compound interest can work in your favor. Most financial institutions use two types of interest: simple and compound. Simple interest collects a percentage only on the principal, while compound interest is accumulated both on the principal balance and any interest that has accrued on the account. Compound interest can be beneficial when calculating future retirement savings, education savings, or long-term investments.
Compound interest really pays off over a long period of time, which is why it’s so important to put together a financial plan at a young age. For more financial tips and tools, visit our WalletWorks page.