(NewsNation) — You’ve stashed away your hard-earned cash as an investment, and now the waiting period for it to double — and then some — begins.
But how long would it take to see your initial investment double? That’s where your annual interest rate and the Rule of 72 formula come in.
What is the Rule of 72?
Originally created by mathematician Luca Pacioli in 1494, the Rule of 72 is a simplified way to determine how many years it will take to double an investment on a fixed rate of interest.
The formula is: doubling time (years) = 72 / expected annual rate of return (%).
For example, if your interest rate is 6%, you’d find your expected doubling time in years is 12 from 72/6. Similarly, a 4% interest rate would double an initial investment in about 18 years.
It’s important to note the formula works best when the annual interest is 8%. The farther an annual interest strays from that number — in either direction — the less accurate your estimate may be.
There are more accurate formulas for calculating that number, but the rule created by the “father of accounting” offers an easy way for investors to estimate payoff timelines.
Can the Rule of 72 calculate inflation impact?
The Rule of 72 works for anything that grows at a compounding rate, such as population or inflation.
In inflation’s case, the simplistic formula can calculate how long it would take for a person’s purchasing power to be cut in half.
Say inflation hits pandemic highs of 8% again — 72/8 results in a 9-year period before your purchasing power is slashed.
Using the Rule of 72, investors can calculate their return, keep inflation in check and even weigh long-term savings plans based on the number of years calculated.