A simple rule-of thumb for investors and savers.
Duncan Lamont, CFA – Head of Strategic Research at Schroders
The rule of 72 is a rule-of-thumb to help you work out roughly how long it could take for your money to double.
Number of years = 72 ÷ by rate of interest/return
This is only an approximation, but I think it is still useful as a quick and easy way to get a ball-park sense of things.
If cash rates had stayed at last year’s rock bottom rate of 0.1%, savings left in cash would have taken approximately 72 / 0.1 = 720 years to double!
On 4% it would take roughly 72 / 4 = 18 years.
These figures take no account of any additional savings that an individual might make, or the impact of inflation.
In the US, the Federal Reserve has raised the federal funds rate to 4.25-4.5%, while the Bank of England’s bank rate is 3.5%. The European Central Bank’s deposit rate is 2.0%. Further rate hikes are expected in the months ahead.
For investors who are prepared to consider investments which are riskier, but which also offer a higher expected return, the expected time to doubling shortens considerably. Corporate bonds currently yield more than 5% in the US and UK (and around 4% in Europe). Riskier high yield bonds and emerging market debt yield more than 8%. Equities also typically offer appealing long term expected returns.
On a 7% expected return, the doubling time falls to a decade.
These are not forecasts, but the rule of 72 is a handy way to take a financial measure, like a rate of interest, and translate it into something which many people will find more tangible.