Some of the most important math skills I need, it turns out, are the basic ones I learned in fourth grade. Simple double-digit multiplication and division can help me TRIPLE my money.
There are two handy rules of thumb that I use when I’m calculating how well an investment will pay off. One is called the “Rule of 72.” The other is the “Rule of 115.”
Read more: Here's another rule of thumb that helps you decide how much to spend on your home, food and fun.
The Rule of 72
The Rule of 72 states shows you how quickly you’ll double your money. Divide 72 by the interest rate. This is the number of years required for your money to double.
For example, if your money is earning an 8 percent interest rate, you’ll double your money in 9 years (72 divided by 8 equals 9.)
If your money is earning a 5 percent interest rate, you’ll double it in 14.4 years (72 divided by 5 equals 14.4.)
If your money is earning a measly 1 percent interest rate, it will take you – yep, you guessed it – a whopping 72 years to double it.
Remember: this is a “rule of thumb,” not an iron-clad law. The Rule of 72 doesn’t adjust for details that make a significant dent in your returns, like taxes and your fund’s administration fees.
But it’s a useful guide for making a quick mental calculation of how long it will take you to turn $10,000 into $20,000. Besides, it’s a fantastic reminder of how powerful a single percentage point can be.
The difference between 6 percent and 7 percent doesn’t sound like much. But the difference between doubling your money in 12 years versus doubling your money in 10.3 years sounds a lot more significant.
As a side note, the Rule of 72 assumes that your money “compounds annually” – a term which means that once a year, your interest gets added to your principal and the entire amount is reinvested.
(Interest is the money you’ve earned; principal is the money you’ve started with.)
The Rule of 72 is also a helpful tool to illustrate the power of compound interest – which Albert Einstein reportedly said is the “most powerful force in the universe.”
Read more: Reasons why the rich should budget, too.
The Rule of 115
I recently learned about the Rule of 115, which is the corollary to the Rule of 72. If you think that doubling your money isn’t good enough, then the Rule of 115 is for you. This rule of thumb shows you how long it will take to TRIPLE your money.
I bet you can guess how the Rule of 115 goes. Divide the interest rate by 115. This is the amount of time it takes you to triple your money.
For example, if your money earns an 8 percent interest rate, it will triple in 14 years (115 divided by 8 equals 14.3.)
If your money earns a 5 percent interest rate, it will triple in 23 years (115 divided by 5 equals 23.)
Note that tripling your money is easier – in some respects -- than doubling your money. If you’re earning a 5 percent interest rate, you’ll spend 14-and-a-half years trying to double it, but only an additional 9 years tripling it.
Read more: The basics of investing for beginners.
Compound Interest Is Your Friend
This, again, is thanks to the power of compound interest. The more interest your money earns, the more money will be working for you.
This assumes you reinvest the interest, rather than spending it on some new clothes or games.
Read more: Will it cost you anything to budget and save (so you can invest and grow wealthy)?
I told a friend about these rules once, and she asked a fantastic question -- “How do I reinvest the interest? How do I know if I’m already doing that or not?”
”If you’re not getting a check or a payment from your investments each year,” I replied, “you’re probably reinvesting the interest.”
Look at the page – or the computer screen – where you buy your funds. You should see a little box that says, “reinvest interest and dividends.” That box will probably be there regardless of whether you’re investing in mutual funds, stocks, bonds or exchange-traded funds.
Check that box and then forget about it. Wait 14 years. Watch your money triple.