The Rule of 72 formula is a quick way to quantify how your investment return builds your wealth over time. You can use this to track your progress to retirement, and ease the process by using the free downloadable Rule of 72 calculator in Excel.
Click to jump to a section:
- What is the Rule of 72?
- How to Use the Rule of 72
- Downloadable Rule of 72 Calculator
- How to Use the Rule of 72 in Your Life
- Using the Rule of 72 Calculator
What is the Rule of 72?
The Rule of 72 is a very simple rule of thumb that people will use to determine how quickly they will double their money. In essence, all that you have to do is take the interest rate and divide it by 72 to get years for your money to double.
For instance, if your interest rate is 7%, it would take you 10.29 years for your money to double, and your equation would look like this:
Honestly, this is one of the easiest rules that you are likely ever to come across, but it is a really good rule of thumb. It can help you quickly analyze your savings/investments and make sure that you are on track.
How to Use the Rule of 72
I was at the gym this weekend and was thinking about retirement (only about 30 more years to go for me lol). I was trying to make sure that we were on track to retire. In my head, I was trying to back into a retirement number.
For instance, assume you are going to get an 8% interest rate (which is my assumption for the S&P 500 as the CAGR since 1950 has been 11%). Then, based on the Rule of 72, your money should double every 9 years.
In my case, since I am 28 years old, if I want to build my retirement until age 65, then I would have just under 37 years. In terms of the Rule of 72, that is really 4 different 9-year periods of doubling my money with that 8% interest rate. For instance, see below.
Sticking with the same 36-year period and an 8% rate of return, your investments would double by year 9, again by 18, 27, 36, and so on.
Let’s say you invest $1,000. Your $1,000 in Year 1 doubles to about $2000 in Year 9, then…
Doubles again to ~ $4000 in Year 18
Doubles again to ~ $8000 in year 27
Doubles again to ~ $16,000 in year 36
In this situation, my goal is to not touch the money until age 65. However, if I could somehow hold off just another 9 more years, all of those numbers at Year 36 would double again! This really is the importance, and the true value, of compounding. Isn’t it addicting?
Downloadable Rule of 72 Calculator
I’ve included this by creating a Rule of 72 calculator in Excel (download here) so that you can enter your own interest rate and starting amount. Play around a bit with the different dollar amounts that you might expect to have.
How to Use the Rule of 72 in Your Life
The Rule of 72 is a great way to find out how much money you can have saved up, but that’s really just a number with no context…
Like, if you save $100,000 now and receive an 8% return every year, you will have nearly $1.6 million in 36 years. Cool! But would you rather be the person going, “My $100,000 turned into $1.6 million in 36 years,” or the person saying, “Man, I really should’ve saved more than $100,000 because my $1.6 million is $1.4 million short of my retirement goal?”
Spoiler – you could be both.
So instead of using the Rule of 72 as a “wow factor,” use it as a way to get yourself back on track. It can help make you aware of how much you need to save for retirement and make sure that you’re on track to meet that goal.
To help you do this, you first need to determine what your retirement number is.
I wrote an article on finding your retirement number a few months back that should help give you a general idea of what that number needs to be for you.
I encourage you to be extra conservative and assume that you will need more than what you actually think you will need. Life is incredibly unpredictable, and one horrible event could blow through an emergency fund or expectations. Better to have more than you need than too little.
I mean, saving too much money is a pretty nice problem to have!
Using the Rule of 72 Calculator
The next step is to take a look at this Rule of 72 calculator that I’ve created.
All you will need to input into the calculator is your assumed interest/growth rate, your current age, your goal retirement age, and the goal retirement amount.
Then, the Rule of 72 calculator will automatically decipher how much money you need to have saved by various ages.
Take a look below:
As you can see, based on wanting to have $3 million by age 65, starting at 25 years old, assuming a 10% return, then you need to have $46,875 just before age 22.
“But Andy, I just told you that I’m 25, and I don’t have that much!”
As you can see, by age 29 you should have $93,750 saved up. Make that your goal.
Maybe you’re at $35,000 right now. Try to get up to $93,750 in the next four years to put you on track with your retirement goal. You could be sitting there with your $35,000 thinking you’re on pace for your retirement goal, but you’re really not.
All this tool does is help open your eyes a little bit to make sure that YOU are meeting YOUR goals.
At the end of the day, everyone’s vision of retirement is different.
Some might want to buy a lake house in Georgia, while others might be content with downsizing their home and staying locally with their family, and others have the goal of early financial independence.
Some people might need $10 million to retire, and others might need $1 million.
The point is, it’s personal.
But I strongly encourage you to follow a very simple three-step process:
- Figure out how much you need to achieve the retirement that you want for yourself and your spouse
- Figure out if you’re on pace to achieve those goals
- Take Action
- Regardless if this means increasing your savings rate or keeping on as you currently are, it’s not a time to slack. If you’re ahead of the pace, don’t slow down – things can always change for the worse, such as family issues that increase spending, health, bad market conditions that reduce your assumed growth rate – anything!
The point is, you have to have a plan. As Katherine Paterson once said, “A dream without a plan is just a wish.”