Rule of 72

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ReformedSpender
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Rule of 72

Post by ReformedSpender »

Interesting analysis posted by Ben Carlson via twitter;

"Annual income earned on $100k in a savings account:

1996 - $5,000

2000 - $6,000

2006 - $4,510

Now - $280

Based on the rule of 72, I estimate it will take forever to double your $$$ in a savings acct"


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Source:
https://twitter.com/awealthofcs/status/ ... 2194121728
Market history shows that when there's economic blue sky, future returns are low, and when the economy is on the skids, future returns are high. The best fishing is done in the most stormy waters.
sailaway
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Re: Could this be the end of "Rule of 72"

Post by sailaway »

The rule of 72 is math, so are you calling for the end of math?

Interest rates suck right now, we get it. Math still works, it just shows how much these interest rates suck.

During some of those previous years, inflation really sucked, too.
Last edited by sailaway on Mon Aug 10, 2020 9:13 am, edited 1 time in total.
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Kenkat
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Re: Rule of 72

Post by Kenkat »

I am making 0.95% in an online savings account. Doing the math, it should double in 76 years or so. That’s different than forever.
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willthrill81
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Re: Rule of 72

Post by willthrill81 »

Savings accounts have not earned a significant real return in decades at least. That does not change math, nor does it make savings accounts poor instruments. They have their purpose.

High-yield savings accounts have far better yields than T-bills.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
000
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Re: Rule of 72

Post by 000 »

Why does anyone care about predicting how long it will take for their investment to double? It will take as long as it takes.
petulant
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Re: Rule of 72

Post by petulant »

The Rule of 72 is actually a simplification of more complex math. It is more accurate close to the 7-10% range but is increasingly inaccurate in its estimate as interest rates become rather large or rather small. For example, using an actual exponential growth number, 7% compounding reaches double in about 10.245 years. Th Rule of 72 says 10.2857. For an interest rate of 1%, the Rule of 72 says 72 years. However, an actual exponential growth number would take 69.661 years. So, at these interest rates, the Rule of 72 really is wrong--but in a good way! (For smaller interest rates, the Rule of 72 overshoots the number of years to double, while for larger interest rates, it undershoots the years.)
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willthrill81
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Re: Rule of 72

Post by willthrill81 »

000 wrote: Mon Aug 10, 2020 9:28 am Why does anyone care about predicting how long it will take for their investment to double? It will take as long as it takes.
One needs some kind of estimate for how long it will take to reach a total portfolio size to know whether it's plausible to reach one's goals in one's desired time frame. But the rule of 72 is almost worthless for that purpose because most accumulators are making ongoing contributions, which the rule of 72 doesn't apply to (yes, it can be used in a very convoluted way for that purpose, but nobody does and with good reason).
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
000
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Re: Rule of 72

Post by 000 »

willthrill81 wrote: Mon Aug 10, 2020 9:39 am
000 wrote: Mon Aug 10, 2020 9:28 am Why does anyone care about predicting how long it will take for their investment to double? It will take as long as it takes.
One needs some kind of estimate for how long it will take to reach a total portfolio size to know whether it's plausible to reach one's goals in one's desired time frame.
I guess I must be an absurdist then :twisted:
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willthrill81
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Re: Rule of 72

Post by willthrill81 »

000 wrote: Mon Aug 10, 2020 9:43 am
willthrill81 wrote: Mon Aug 10, 2020 9:39 am
000 wrote: Mon Aug 10, 2020 9:28 am Why does anyone care about predicting how long it will take for their investment to double? It will take as long as it takes.
One needs some kind of estimate for how long it will take to reach a total portfolio size to know whether it's plausible to reach one's goals in one's desired time frame.
I guess I must be an absurdist then :twisted:
How do you know that your saving/investment plan has a reasonable shot of enabling you to reach your investment goals if you have no idea what your returns, time frame, amount saved, etc. will be?
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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Re: Rule of 72

Post by 000 »

willthrill81 wrote: Mon Aug 10, 2020 9:45 am
000 wrote: Mon Aug 10, 2020 9:43 am
willthrill81 wrote: Mon Aug 10, 2020 9:39 am
000 wrote: Mon Aug 10, 2020 9:28 am Why does anyone care about predicting how long it will take for their investment to double? It will take as long as it takes.
One needs some kind of estimate for how long it will take to reach a total portfolio size to know whether it's plausible to reach one's goals in one's desired time frame.
I guess I must be an absurdist then :twisted:
How do you know that your saving/investment plan has a reasonable shot of enabling you to reach your investment goals if you have no idea what your returns will be?
My investment goal is to get what I can, so I will get that by doing what I am doing :mrgreen:
TNWoods
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Re: Rule of 72

Post by TNWoods »

Kenkat wrote: Mon Aug 10, 2020 9:12 am I am making 0.95% in an online savings account. Doing the math, it should double in 76 years or so. That’s different than forever.
You will be dead in 76 years, so for you, it's forever.

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RadAudit
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Re: Rule of 72

Post by RadAudit »

TNWoods wrote: Mon Aug 10, 2020 9:52 am You will be dead in 76 years, so for you, it's forever.
+1 - for me, anyways.
FI is the best revenge. LBYM. Invest the rest. Stay the course. - PS: The cavalry isn't coming, kids. You are on your own.
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Kenkat
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Re: Rule of 72

Post by Kenkat »

TNWoods wrote: Mon Aug 10, 2020 9:52 am
Kenkat wrote: Mon Aug 10, 2020 9:12 am I am making 0.95% in an online savings account. Doing the math, it should double in 76 years or so. That’s different than forever.
You will be dead in 76 years, so for you, it's forever.

TNWoods
Let the record show that at 10:57am EDT on August 10, 2020, mortality rears its ugly head and punches me in the gut :beer
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Re: Rule of 72

Post by jeffyscott »

petulant wrote: Mon Aug 10, 2020 9:36 am The Rule of 72 is actually a simplification of more complex math. It is more accurate close to the 7-10% range but is increasingly inaccurate in its estimate as interest rates become rather large or rather small. For example, using an actual exponential growth number, 7% compounding reaches double in about 10.245 years. Th Rule of 72 says 10.2857. For an interest rate of 1%, the Rule of 72 says 72 years. However, an actual exponential growth number would take 69.661 years. So, at these interest rates, the Rule of 72 really is wrong--but in a good way! (For smaller interest rates, the Rule of 72 overshoots the number of years to double, while for larger interest rates, it undershoots the years.)
It's way off, by about 33 years, at the current 1 month T-bill rate of 0.08%. :)
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Re: Rule of 72

Post by #Cruncher »

petulant wrote: Mon Aug 10, 2020 9:36 amThe Rule of 72 is actually a simplification of more complex math. It is more accurate close to the 7-10% range but is increasingly inaccurate in its estimate as interest rates become rather large or rather small. For example, using an actual exponential growth number, 7% compounding reaches double in about 10.245 years. Th Rule of 72 says 10.2857.
If a scientific calculator is within reach, there is no need of this shortcut. The correct answer equals the logarithm of 2 divided by the logarithm of 1 plus the growth rate. And this can be easily modified to determine how long it would take to triple, quadruple, etc. E.g., the doubling and tripling periods with 7% growth:
10.245 = log(2) / log(1.07)
16.238 = log(3) / log(1.07)

Code: Select all

Period   --------- Doubling Period ----------
Growth   Rule 72    Actual    Diff     Diff %
------   -------    ------   ------    ------
 0.08%   900.000   866.781   33.219      3.8% 
 0.16%   450.000   433.563   16.437      3.8% 
 0.32%   225.000   216.955    8.045      3.7% 
 0.64%   112.500   108.650    3.850      3.5% 
 1.28%    56.250    54.498    1.752      3.2% 
 2.56%    28.125    27.421    0.704      2.6% 
 5.12%    14.063    13.882    0.181      1.3% 
 7.00%    10.286    10.245    0.041      0.4% 
10.00%     7.200     7.273   (0.073)    (1.0%)
20.00%     3.600     3.802   (0.202)    (5.3%)
Samosa22
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Re: Rule of 72

Post by Samosa22 »

Kenkat wrote: Mon Aug 10, 2020 9:12 am I am making 0.95% in an online savings account. Doing the math, it should double in 76 years or so. That’s different than forever.
It is indeed forever, for you, personally.
Lesson learned from 2008 financial crisis: "In the fury of the final hour, all correlations went to 1".
sailaway
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Re: Rule of 72

Post by sailaway »

Samosa22 wrote: Tue Aug 11, 2020 10:00 pm
Kenkat wrote: Mon Aug 10, 2020 9:12 am I am making 0.95% in an online savings account. Doing the math, it should double in 76 years or so. That’s different than forever.
It is indeed forever, for you, personally.
Actually, it is never, which isn't the same.
Samosa22
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Re: Rule of 72

Post by Samosa22 »

sailaway wrote: Tue Aug 11, 2020 10:04 pm
Samosa22 wrote: Tue Aug 11, 2020 10:00 pm
Kenkat wrote: Mon Aug 10, 2020 9:12 am I am making 0.95% in an online savings account. Doing the math, it should double in 76 years or so. That’s different than forever.
It is indeed forever, for you, personally.
Actually, it is never, which isn't the same.
ok, but what about "never say never" :wink:
Lesson learned from 2008 financial crisis: "In the fury of the final hour, all correlations went to 1".
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Re: Rule of 72

Post by flaccidsteele »

ReformedSpender wrote: Mon Aug 10, 2020 9:09 am Interesting analysis posted by Ben Carlson via twitter;

"Annual income earned on $100k in a savings account:

1996 - $5,000

2000 - $6,000

2006 - $4,510

Now - $280

Based on the rule of 72, I estimate it will take forever to double your $$$ in a savings acct"


Image

Source:
https://twitter.com/awealthofcs/status/ ... 2194121728
In other news, water is wet
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat
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BL
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Re: Rule of 72

Post by BL »

Back in the olden days, we didn't have computers or fancy calculators routinely available to get these numbers so estimates like "the Rule of 72" were quite useful. You might have to dig out a book of tables for various rates and times for things like this. I have also seen amortization tables as well as pages of random numbers. It is amazing what chemists and engineers could accomplish with a fancy slide rule!
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Re: Rule of 72

Post by Valuethinker »

BL wrote: Wed Aug 12, 2020 12:21 am Back in the olden days, we didn't have computers or fancy calculators routinely available to get these numbers so estimates like "the Rule of 72" were quite useful. You might have to dig out a book of tables for various rates and times for things like this. I have also seen amortization tables as well as pages of random numbers. It is amazing what chemists and engineers could accomplish with a fancy slide rule!
In my uncle's case, it was nuclear power stations - with a slide rule. Which I still have.

I am reassured though. Any calculation, they would have one engineer do it, then another engineer do it, completely separately.

Those nuclear power stations are still there, still generating electricity 50 years later.
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Re: Rule of 72

Post by bondsr4me »

Kenkat wrote: Mon Aug 10, 2020 9:12 am I am making 0.95% in an online savings account. Doing the math, it should double in 76 years or so. That’s different than forever.
hang in there....time flies when you're having fun :)

just keep thinking of all that money you'll (or your grandchildren!) will have!!

ha ha

have a great day.
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