What is the Rule of 72?
Rule of 72 Overview
The Rule of 72 is a quick, useful formula that is popularly used to estimate the number of years required to double the invested money at a given annual rate of return. While calculators and spreadsheet programs like Microsoft Excel have functions to accurately calculate the precise time required to double the invested money, the Rule of 72 comes in handy for mental calculations to quickly gauge an approximate value. For this reason, the Rule of 72 is often taught to beginning investors as it is easy to comprehend and calculate.
The Rule of 72 dates back to 1494 when Luca Pacioli referenced the rule in his comprehensive mathematics book called Summa de Arithmetica.
“The Rule of 72 applies to cases of compound interest and is calculated on both the initial principal and the accumulated interest of previous deposits.”
Details on the Rule of 72
The Rule of 72 can be leveraged in two different ways to determine an expected doubling period or required rate of return.
Years To Double: 72 / Expected Rate of Return
To calculate the time period an investment will double, divide the integer 72 by the expected rate of return. The formula relies on a single average rate over the life of the investment. The findings hold true for fractional results, as all decimals represent an additional portion of a year.
Expected Rate of Return: 72 / Years To Double
To calculate the expected rate of interest, divide the integer 72 by the number of years required to double your investment. The number of years does not need to be a whole number; the formula can handle fractions or portions of a year.
Rule of 72 Example
How Do You Calculate the Rule of 72?
Here's how the Rule of 72 works. You take the number 72 and divide it by the investment's projected annual return. The result is the number of years, approximately, it'll take for your money to double.
For example, if an investment promises an 8% annual compounded rate of return, it will take approximately nine years (72 / 10 = 7.2) to double the invested money. If it takes approximately 7 years to double a $1,000 investment, then the investment will grow to $2,000 in year 7.
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