The rule of 72 is a simple formula that estimates how quick your money will double at a given rate of return. It works by dividing 72 by your annual compound interest rate and seeing how many years it will take for your investment to double. There are many uses for the rule of 72, most notably planning for your investments and financial goals. 

The rule has gained popularity amongst the personal finance community because of how simple it is to use. Simply take the number 72 and divide it by the expected fixed rate of return on your investment each year. This will give you an estimate of the number of years it will take for your investments to grow by 100% –  in other words, double. 

For example:

72 ÷ fixed annual interest rate = number of years until your investment doubles

So, if you invest N$10 000 today at a fixed return of 10% per year and make no other contributions during that time, it will take 7.2 years for that N$10 000 to double to N$20 000. 

The rule of 72 is important when saving and investing because it helps us plan according to the different financial targets we want to reach. More importantly, it helps us manage our expectations. 

It is simple and can be used by any investor, allows investors to determine the time it will take to double their investments and can be applied to other market factor such as GDP, population rate, etc., as long as there is an estimated annual rate of interest.

It is important to note that because of the simplicity of this formula various factors are not taken into account that can affect the actual length of time it takes for an investment to double such as volatility of returns, inflation and fees.

Other limitations include:

The Rule of 72 is mostly accurate for a lower rate of returns between 6-10%. For anything higher, the estimated value can fluctuate. 

It is not an accurate value and can only give a rough estimation of the period for doubling the investment.

The Rule of 72 does not work with investments that have a changing interest rate.

In conclusion, this equation can help you make important financial decisions, such as when to start saving for retirement or how to invest your money. The rule of 72 is a helpful tool, but it is important to remember that it is only an estimate. Your actual return may be higher or lower than you expect.

*Thembi is a financial planner and coach. She runs her own financial coaching business FinWellness Solutions. Get in touch at kandangatn@gmail.com