The Rule of 72: A Simple Trick to Estimate Investment Growth
Imagine you invest $1,000 in a savings account or stock that earns interest. How long will it take for your money to double? While precise calculations require complex math, the Rule of 72 offers a quick, easy way to estimate doubling time—no calculator needed. This article breaks down what the Rule of 72 is, how to use it, and why it’s a favorite tool for investors.
What Is the Rule of 72?
The Rule of 72 is a mental math shortcut to estimate how long it will take for an investment to double in value, assuming a fixed annual rate of return. Here’s the formula:
Years to Double = 72 ÷ Annual Interest Rate
For example:
- At a 6% return, your money doubles in 12 years (72 ÷ 6 = 12).
- At a 9% return, it doubles in 8 years (72 ÷ 9 = 8).
How to Use the Rule of 72
Let’s walk through practical examples:
Example 1: Retirement Savings
Let’s say you invest $10,000 in a fund that earns a 7% annual return.
- Step 1: Divide 72 by the interest rate (7%).
72 ÷ 7 = 10.3 years - Step 2: This means your 20,000 in roughly 10 years.
Why is this useful?
- Quick Estimates: No complex math needed.
- Compare Investments: For example:
- A 4% return doubles money in 18 years (72 ÷ 4).
- A 12% return doubles money in 6 years (72 ÷ 12).
- Understand Inflation: If inflation is 3%, prices double in 24 years (72 ÷ 3).
Example 2: Comparing Investments
- Investment A offers a 4% return.
Doubling time = 72 ÷ 4 = 18 years. - Investment B offers a 12% return.
Doubling time = 72 ÷ 12 = 6 years.
This shows how higher returns significantly accelerate growth.
For deeper learning, check out Rule of 72: How to Compound Your Money and Uncover Hidden Stock Profits
Why Does the Rule of 72 Work?
The rule approximates the mathematical formula for compound interest:
Years to Double=ln(2)/ln(1+r)
(where = annual interest rate).
The number 72 is chosen because it’s divisible by many rates (6, 8, 9, etc.), making mental math easy. It also closely matches logarithmic results for common rates (4–15%).
Applications Beyond Doubling
The Rule of 72 isn’t just for investments! Use it to:
- Estimate Inflation’s Impact:
If inflation is 3%, prices double in 24 years (72 ÷ 3). Your money’s purchasing power halves in that time. - Calculate Required Returns:
Want to double your money in 9 years? You’d need an 8% return (72 ÷ 9 = 8). - Assess Debt Growth:
A credit card with 18% interest? Your debt doubles in 4 years (72 ÷ 18) if unpaid.
Limitations to Keep in Mind
While handy, the Rule of 72 has caveats:
- Approximation Only: It’s less accurate for very high or low rates.
- At 2%, the rule says 36 years; the actual time is ~35 years.
- At 20%, it estimates 3.6 years vs. the real ~3.8 years.
- Assumes Constant Returns: Real-world investments fluctuate.
- Ignores Taxes/Fees: These reduce actual returns.
Rule of 72 vs. Reality: A Quick Comparison
| Interest Rate | Rule of 72 Estimate | Actual Years (Compound Formula) |
|---|---|---|
| 6% | 12 years | ~11.9 years |
| 8% | 9 years | ~9.01 years |
| 12% | 6 years | ~6.12 years |
| 15% | 4.8 years | ~4.96 years |
Final Thoughts
The Rule of 72 is a powerful yet simple tool to grasp compounding growth. While not perfect, it helps investors make quick comparisons, set realistic goals, and understand the impact of fees or inflation. Pair it with detailed financial planning for smarter decisions—and watch your money grow!
Pro Tip: Teach this rule to kids or new investors. It’s a fun way to demystify finance!
Share your favorite moments with us on Instagram!
Don’t keep this to yourself—share it with a friend!
