The Rule of 72

In the finance world we sometimes use the rule of 72, in truth it’s mainly for examination questions. The purpose of the rule is to establish how long it would take to double your money given a set investment return.

Those with a keen sense of maths will appreciate that returns are very rarely fixed, so the formula has limitations for real-life application.

So let’s take an example of a cash deposit paying 3% a year

72/3 = 24 (years)

An investment with a return of 9% a year would take  8 years (72/9 = 8).

As we enter 2025, those of you holding cash of £100,000 would need to wait until 2049 to see this become £200,000. For those investing and achieving 9% a year, your £100,000 becomes £200,000 in 2033 and £400,000 by 2041 and £800,000 by 2049.

Now for those of you working within financial services, or if you work for the FCA, I am not suggesting investments are 9% a year, this is merely designed to demonstrate the point of the maths and yes I am ignoring inflation. In this theoretical world with predictable results of compounding annual returns we might observe the values over time as shown below. The orange line being a 3% annual return and 9% being the blue line.

So whilst theoretical, there are obvious inferences. Investments offering low returns are often deemed as having less risk… but less risk of what? In the same way that higher returns are considered higher risk. For most people building wealth over time, holding too much in ‘low risk’ / low growth investments will have a detrimental effect over time.

So the questions you need to consider are the timeframe for your goals and how much you need to allocate towards growth (genuine growth assets).