How long will it take for your investment to double in value?

If you divide the interest rate (compounded annually) into 72, you'll know.

For the most part.

The so-called Rule of 72 is only so accurate, as It's Only Money learned recently in its personal finance textbook.

More below...

Let's say you want (You don't) to figure when your current balance in your ING Direct "high interest" savings account will double.

The Rule of 72 calls for you to multiply 72 by the current annual yield<http://home.ingdirect.com/products/products.asp?s=OrangeSavingsAccount>, a whopping 1.40%.

72/1.40 = 51.4.

That 51.4 year figure is why you didn't want to know when your money will double.

Good news, though. The Rule of 72 really is only accurate for yields of 6 to 10 percent. Outside that range, the time estimate can be off by a year or more.

With an annual return of 1 percent, for example, the ultimate year can be off by 2.4 percent. Around 14 percent, its error rate is -1.8 percent.

The actual answer to my first example above, according to my handy TI BA II Plus, is 49.9 years.

"Many financial planners are using the Rule of 72 without considering the error factors," writes the authors of Personal Financial Planning Theory and Practice. Wide Open Wallet<http://wideopenwallet.com/> via PT Money<http://ptmoney.com/2009/03/06/the-rule-of-72-doesnt-work/> had this figured out months ago.

But it's not a bad rule of thumb<http://www.moneychimp.com/features/rule72_why.htm> for many investment returns you'll expect over time.

You can e-mail Brent at brenthunsberger@news.oregonian.com<mailto:brenthunsberger@news.oregonian.com>.

Brent Hunsberger
Personal Finance Columnist
The Oregonian
1320 SW Broadway
Portland, OR 97201
Land: 503-221-8359
Cell: 503-706-3098
FAX: 503-294-4079
Web: www.oregonlive.com/itsonlymoney
www.twitter.com/onlymoney

Have a nice day!

	Web www.foxonlinelearning.com

 

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