Understanding the Rule of 72

    Published: 06-16-2009
    Views: 12,974
    A Wells Fargo representative explains a financial principal called The Rule of 72. This rule gives you a simple way to determine the amount of time needed to double your money, at a certain interest rate or rate of return.

    Beverly Butler: Hi! I am Beverly with Wells Fargo & Company. Today we're learning about a financial principal called The Rule of 72. This rule gives you a simple way to determine the amount of time needed to double your money, at a certain interest rate or rate of return.

    For example, if you have an account that earns 2% per year compounded annually, you divided 72 by 2 which is the rate of return and you get 36. That means it will take 36 years for your money to double at 2% per year. But, if you're able to get 4% return per year then it will take only 18 years, that's 72 divided by 4, for your money to double.

    Keep in mind if you get 4% per year your money would double in 18 years and will double again in another 18 years. Which means you would have 4 times, as much money in your account as you had when you started.

    That doubling effect can really build up your account over time. While interest rates have been relatively low in recent years, the historical interest rate for money market accounts and CDs is actually about 5%. If you divide 72 by 5 you get a little over 14, which means your money doubles about every 14 years.

    Make time your friend. It's never too late or too early to start saving or to start saving more. If you would adjust $5 a day to your savings account that earned 5% interest and did this for 30 years your account would be worth about $127,000 at the end of those three decades.

    The more time you have to save, the more compounding can work for you. Remember with compound interest your money will grow both bigger and faster. Compare annual percentage yields. A quick way to determine which savings accounts will pay you most is to compare the annual percentage yield of the accounts.

    The higher the APY the more, interest you'll receive and the more quickly you can take advantage of The Rule of 72. Well we are talking about savings accounts for now the rule of 72 really makes a huge difference when it comes to investment accounts.