# Rules Of Thumb

RULES OF THUMB

As a rule of thumb, it is usually best to avoid rules of thumb.  However, here are a few that you might find handy when it comes to estimating compound returns.  These work great if you just need a rough idea and don’t want to bother with a spreadsheet or finding the HP12c that you haven’t used since college.

Most people are familiar with the “Rule of 72” which is a simple way to estimate how long it will take money to double at a constant rate of return.  Just divide the rate of return into 72.  The result will be the number of years it will take for that money to double.  For example, lets say that Bob invests \$10,000 into an investment that he expects to earn 7% on each year.  Seven goes into seventy-two nearly 10.3 times which means that it will take a little over 10 years for Bob to earn an additional \$10,000 on his initial investment of \$10,000.  If Bob is only able to get a 5% return, it will take him nearly 14 ½ years to earn \$10,000.

So, how long will it take Bob to triple his \$10,000 investment?  This can be estimated using the lesser known “Rule of 116.”  Simply divide the expected rate of return into 116 the same way you would 72.  Again, supposing that Bob earns 7% it will take almost 16 1/2 years for Bob to have a total of \$30,000.

But, say that Bob wants to add money every year to his investment.  This can be more complicated to figure since each year principle is being added to principle and previous returns.  This is where the “Rule of 144” comes in handy.  In this case, Bob decides to contribute \$4,000 each year into his IRA.  As with the other rules, we divide the rate of return, 6 percent, into 144.  This will give Bob an idea of how long it will take his earnings to equal his contributions.  In this case, 6 goes into 144 twenty four times which means that in 24 years Bob will have contributed \$96,000 to his IRA, and that he would have earned an additional \$96,000 on his contributions, giving him a total of \$192,000 in his retirement account.  (24 X \$4,000 X 2).  Note that the estimate of \$192,000 is lower than the actual amount Bob would have which would be closer to \$203,000, but this Rule should give you a reasonable approximate.

Keep in mind that returns are generally not constant over long periods of time and these rules only give approximations.  If you need to be exact, better get the spreadsheet or HP.

Kimber Heaton is a Certified Financial Planner (CFP) and the principle of HEATON FINANCIAL, a Registered Investment Advisor, and can be reached at info@heatonfinancial.com or 435-272-4362.