72/Rate of Return ≈ Years to Double Value
Old as the Renaissance, this simplified rule should be shouted from rooftops, emblazoned on blimps and taught in every schoolroom. The consequences are profound: Save now for babes in arms. Indifferent to your future, let salespeople whimper. Sacrifice fun to pay off debt. Avoid investment fees, run from bank savings to justifiable investment risks.
I was oblivious to money as an idealist teacher until I met this rule. Half awakened now, I monitor money carefully per “the Time value of money” and enumerated exactingly by CFP’s fumbling with planning calculators and software.
Please struggle through the math of financial life planning:
Imagine that your 18-year-old works, earns $1,000 and invests hypothetically at 4, 8 or 11% rates. Ignore market risk, inflation and taxes, which can be negated with a Roth IRA. 72/4 = 18 years to double; 72/8 = 9 years; and 72/11 = 6.5 years. At 4%, they would see $2,000 at age 36, $4,000 at 54 and $8,000 at 72. At 8%, they have $2,000 at age 27, $4,000 at 36, $8,000 at 45, $16,000 at 54, $32,000 at 63 and $64,000 at 72. Imagine the 11% return: At age 27, they have $4,000, then $7,000 at 36, $14,000 at 45, $56,000 at 54, $108,000 at 63 and $216,000 at 72.
Past performance never guarantees future results, and stock prices certainly fluctuate more than bonds or CDs. Stocks dipped 30% in 2008. But over the last 50 years, Forbes reports that “stocks averaged 11.1% annual returns while Baa Corporate Bonds delivered 8.49% on average, and cash yielded 4.3%.”
From January 1971 (when the dollar became unlinked to gold) to December 2019, gold had an average annual return of 10.6%. CDs look good now but rarely go over 5%, and wallethub.com daringly estimates Social Security returns at 5.7%. Worlddata.info calculated inflation at 3.8% from 1960 to 2022, so subtract this to see real rates of return that sometimes drown CDs.
The real estate story is similar but with fluctuating interest rates financing leveraged investments, which frequently beat stock market returns: Investopedia reports that “From March 1980 through September 2023, the U.S. housing market’s annualized average growth rate was around 8.6%.” If you borrowed $600,000 at 4% to buy an $800,000 house, the appreciation is 8% of $800,000, which means the house doubled to $1.6 million in nine years while the loan interest (principal unpaid) only rose by 72/4 * $600,000 equals $300,000. So you turned $200,000 into $500,000 with returns over 15%. Few will play this game with higher 2023-24 interest rates and fewer qualify for loans even to try.
High fees on full load mutual funds, annuities, life insurance investments, etc., might lower returns by 2-3%; seemingly small fees downgrade your retirement dramatically. Banks and insurance companies tell consumers to save at low savings account or CD rates to avoid risks, but then they lend this money for credit cards and shopping centers earning vastly greater returns that consumers can earn directly.
The Rule of 72 flaunts mathematical cruelty when applied to debt. Ignore gangland loans: Payday lenders frequently charge $15-20 per $100 borrowed, which amounts to 391-521% APR. This borrowed money doubles debt four times a year!
Marketwatch.com tallies Californians’ credit card debt at $4,190. Federalreserve.com states that credit card APR’s have almost doubled to a record high of 22.8% in 2023. 72/22 approximates 3, so in roughly three years a maxed-out credit card will cost you double what you borrowed.
Have fun estimating everything financial!
We all need to live mindfully, budget ruthlessly and seek extra income to get out of debt quickly. The Rule of 72 strongly suggests early investing in long-term stock, gold or real estate—if history kindly repeats itself. Indifference or necessity makes us save too little, but fear frequently drives us away from investments that make the difference between retirement hell and retirement bliss.
Robert Arne, EA, CFP, MS, of Carpe Diem Financial Life Planning, gives holistic financial advice as his client’s fee-only fiduciary. He serves mostly Santa Cruz Mountain dwellers. These articles must not be read as personal financial, mortgage, tax or investment advice; consult appropriate professionals. Learn more at www.carpediem.financial.
