Investing is all about the numbers. In choosing and evaluating real estate investments, critical decisions are made every day based on, among other things, an in-depth understanding of the numbers attached to a project. Investors are often focused on predicting just how long it will take to recoup their investment and realize a gain. The “Rule of 72” is a useful tool employed to estimate the number of years required to double an initial investment based on a specified annual rate of return.
How Long Will it Take for Your Investment to Double?
The Rule of 72 formula is a simple variation on an ancient mathematical logarithm:
Years to Double = 72 ÷ Interest Rate
By way of example, a crowdfunding real estate investment anticipating a 6% annual rate of return will offer investors the opportunity to double their initial investment in 12 years.
72 ÷ 6 = 12 years to double initial investment
It is important to remember that the Rule of 72 is a tool used to estimate the rate of return on investments. No one can accurately predict everything that will happen during the life of an investment, but understanding the Rule of 72 can help forecast investment growth and wealth accumulation. The great thing about it is that you don’t need a complicated Excel spreadsheet or financial calculator to peek into the future.
The Wonders of Compound Interest
If your current retirement portfolio is valued at $100,000 and you are averaging 9% in annual returns, based on the Rule of 72, your portfolio will double and increase to $200,000 in 8 years. In another 8 years, your retirement nest egg should increase to $400,000 – and this does not even include any new money contributed made after the initial $100,000. Welcome to the wonders of compound interest – every investor’s best friend! In order to take advantage of the many benefits of compound interest, you must start investing early and think long term. It is no wonder that Albert Einstein is rumoured to have once referred to compound interest as “one of the most powerful forces in the universe.”
When faced with the task of evaluating different investments, the Rule of 72 always come in handy. Let’s say your Great Aunt Betty passes away and leaves you $10,000. We will apply the Rule of 72 to help evaluate several investment options for your dear aunt’s money. U.S. 10-year treasury notes are offering 1.75%. addy is offering a crowdfunded investment in a mixed-use development with an anticipated 5% annual return. If you invest in the T-bills, it may take over 41 years to double your money and you will probably be a grandparent yourself by then. The same $10,000 invested through the addy platform should enable you to double your money in only 14 years and $20,000 can then grow to $40,000 in another 14 years in a similar investment.
How Long Will it Take for Investments to Lose Value?
Just as the Rule of 72 can help predict how long it will take to double your money, the same rule can estimate how long it will take for money to lose its value. If you were to take the same $10,000 inheritance from Aunt Betty and stash it under your mattress, it will inevitably lose value over time due to the ravages of inflation. In this case, you will need to divide 72 by an assumed rate of inflation. Let’s use 4% for our example. 72 ÷ 4 = 18. In 18 years, the $10,000 stuck in a drawer or an equivalent low-interest account will have lost one-half of its value.
Obviously, there are many other factors to consider when choosing and evaluating investment vehicles and platforms. There are no “sure things” and every investment will follow its own track, but the Rule of 72 equips investors with the ability to make quick mental calculations in comparing products and envisioning their financial. Perhaps most importantly, it’s a reminder to get moving and start investing now if you hope to secure a comfortable future.
SECURE A COMFORTABLE FUTURE: