Working in both the financial and investment fields I have always been fascinated by numbers. Here is a Review of the The Rule of 72.
What Is the Rule of 72?
The Rule of 72 is a easy method to calculate what time period an investment will to double given a fixed annual rate of interest. By dividing 72 by the annual rate of return, investors can come up with a approximate estimate of how long in years it will take for the starting investment to double itself.
How it Works
Lets look at an example, the Rule of 72 says that $1 invested at an annual fixed interest rate of 10% would take 7.2 years ((72/10) = 7.2) to grow to $2. The reality is a 10% investment will take 7.3 years to double ((1.107.3 = 2).
The Rule of 72 is fairly accurate for low rates of return. See that the chart below approximates the numbers derived by the Rule of 72 and the correct number of years it takes for an investment to double.
The Formula for the Rule of 72
Years to double =72/interest rate
Key Takeaways
- The Rule of 72 is a quick & dirty formula that estimates how long it’ll take for any given investment to 2x in value, using its rate of return.
- The Rule of 72 applies to compounded interest rates and is fairly accurate for interest rates that in the range of 6% and 12%.
- The Rule of 72 can be applied to anything that increases exponentially, such as inflation; it can also show the long-term effect of yearly fees on the growth of money or an investment.
Rate of Return Rule of 72 Actual # of Years Difference (#) of Years
2% 36 years 35 actual years 1 years difference
3% 24.0 years 23.450 actual years .6 year difference
5% 14.4years 14.21 actual years 0.2 year difference
7% 10.3 years 10.24 actual years 0.0 year difference
9% 8.0 years 8.04 actual years 0.0 year difference
12% 6 years 6.2 actual years .01 year difference
Notice that although it gives an estimate, the Rule of 72 is less precise as rates of return increase.