What is the rule of 72 and how can it double your savings?
What is the rule of 72 and how can it double your savings?
A new house, car, long-planned holiday, or money for your children to get through university, whatever your savings goals, you’ll want to know how long it will take to meet them.
Savings rates are at rock bottom right now, thanks to a delayed period of low interest from the Bank of England, so seeking out a decent rate of interest is tricky. Yet there are accounts available to help you boost your savings pot.
The rule of 72 is a clever maths calculation which shows you exactly how much interest you’ll earn on any money you have stored away. It’s important as it helps you calculate how long you need to save to meet your savings goals.
Here we look at exactly how it works, how it can help you, and where you should put your money to get the highest interest rates possible.
Please remember you may not get back the full amount you put in. Your capital is at risk if you invest and not protected by the Financial Services Compensation Scheme (FSCS).
What’s happening with savings rates?
Since the start of the coronavirus pandemic in March 2020, savings rates have remained dismally low. That’s because the Bank of England lowered the rate to cope with the economic hit from the pandemic.
In that time it has slowly been increasing, with the latest rise in March putting it at 0.75%.
The Bank cited the worldwide turmoil of the war in Ukraine, the ongoing cost-of-living crisis in the UK, and the high rate of inflation in justifying the increase.
It said at the time: “Given the current tightness of the labour market, continuing signs of robust domestic cost and price pressures, and the risk that those pressures will persist, the Committee judges that an increase in Bank Rate of 0.25 percentage points is warranted at this meeting.”
With rates at such a low level, savers are desperately trying to find accounts paying interest, ideally a rate that beats inflation.
If it’s investments you’re debating, you might want to do a little financial planning first, to calculate how long your money will be invested for and how much you can expect in a return.
While with investments returns are never guaranteed, it’s helpful to have a rough idea of the kind of return you could see - and how long it can take. This goes for savings accounts too, should you keep your savings pot locked in a savings account for two, three, or five years, for example? One way to give you an idea is by using the rule of 72.
How does the rule of 72 work?
You can use the Rule of 72 to estimate the number of years it will take to double your savings, if they are earning a specific rate of interest. It can also be used to see how much your investments may fall by 50%.
These two examples give you an idea of how it works:If your savings are earning 4% interest, for example, if you divide 72 by four to get 18 - this is the number of years it will take for your money to double.
- If your savings are earning 4% interest, for example, if you divide 72 by four to get 18 - this is the number of years it will take for your money to double.
- If your account is earning 8%, which could be possible with the easyMoney Innovative Finance ISA (IFISA) or regular savings account, you divide 72 by eight to get nine, which is the number of years it will take for your savings to double.
These examples are a simplification of the rule, as the actual principle and calculation is a lot more complex.
You can’t use the rule on all calculations, in fact it’s most effective on interest rates between 6% and 10%, as explained in Business Insider. You can also only use the rule on compounding interest - that’s interest earned on interest.
Compound interest works by you saving money and earning interest on the money. Then every year you keep the money where it is, you also earn interest on the interest you’ve already earned. This means the rate at which your savings grow increases over time.
It’s not an exact science either, more of an approximation and therefore not 100% accurate, according to this article from Bankrate. But it can be useful for giving you a rough idea of how long it will take for your savings or investments to grow.
What is the calculation for the rule of 72?
The rule of 72 in its most basic form is the following calculation:
Years to double = 72 / rate of return on investment (or interest rate).
Where can you get the best rate of interest for your savings?
You have a lot of options with savings. If it’s a cash account you’re after, you won’t be able to find an account currently beating the rate of inflation - although keeping your money in a cash account is the safest place for it.
There’s also investing, although it’s generally accepted any investment needs to be a long-term thing, over at least five years, and while returns can be higher than with a cash savings account, they’re not guaranteed.
Another option is an IFISA. Rates beat inflation, there’s a little more flexibility than with investments as you don’t always need to leave your money locked away for so long, but as with investing there’s no guarantee you’ll get your money back.
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All the facts and figures presented are accurate at the time of posting.
easyMoney is not a cash savings account. You may not get back the full amount you put in. Your capital is at risk if you invest. Peer-to-peer investments are eligible for an Innovative Finance ISA which is not a Cash ISA. They are not protected by the Financial Services Compensation Scheme (FSCS). Money invested through easyMoney is concentrated in property and could be affected by market conditions. For the same reason, instant access cannot be guaranteed. We do not offer investment or tax advice.
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