The Rule of 72: What Is It, and How Can You Use It? - SmartAsset (2024)

The Rule of 72: What Is It, and How Can You Use It? - SmartAsset (1)

Key Takeaways:

  • The rule of 72 can help you forecast how long it will take for your investments to double.
  • Divide 72 by the annual fixed interest rate to determine the rate at which the money would double.
  • Historical returns on your investment type can help choose a realistic expected return rate, in some cases.

The rule of 72 is a simple formula that shows how quickly your money will double at a given return rate. It works by dividing 72 by your annual compound interest rate and seeing how many years it will take for your investment to double. There are many uses for the rule of 72, most notably planning ahead for your long-term investments and retirement goals. While it isn’t the most accurate way of projecting returns, it allows you to see if you’re keeping pace in a quick and basic way so that you can know if you’re on track.

Consider working with afinancial advisorwho can help you build an investment and financial plan for your future goals.

What Is the Rule of 72?

If you want to know how long it will take you to double your investment at a specific fixed interest rate, the rule of 72 is the fastest way to do so. But even if you’re not looking to multiply your money twofold, knowing the period of time it would take to do so can help you infer when you would reach your goal portfolio size.

Learning how to calculate compound interest is a complex mathematical procedure that leaves most people reaching for a calculator. To get started, figure out what your fixed compound annual interest rate is. Once you know this, you must divide it into 72 (hence the rule of 72). The quotient is the number of years it will take for your invested money to double in value.

When doing math, most people are used to writing out percentages in decimal forms, such as 4% written out as 0.04. Contrary to this, be sure to keep the rate as a whole number or your answer will be woefully off the mark.Below is a mathematical representation of the rule of 72:

72÷ your compound annual interest rate = how many years until your investment doubles

When it comes to the accuracy of this rule, the best results are found at an 8% annual interest rate. However, you can feel confident using it for any percentage from 4% to 15%. Beyond these parameters, the rule becomes a bit too imprecise to be trusted. In the end, though, nothing can beat doing a true compound interest calculation.

Examples of How the Rule of 72 Formula Works

In this table, you’ll find a few examples of the rule of 72 in action:

The Rule of 72

DividendAnnual Interest RateInvestment Doubles in…
72÷14%=5.1 years
72÷8%=9 years
72÷5.50%=13.1 years
72÷4%=18 years

The rule of 72 also works in reverse. You can divide the number 72 by the number of years in which you wish to double your investment, and the answer will show you the annual interest rate you need to achieve your goal. Look below to see a few scenarios where this could be helpful:

The Rule of 72: Reversed

DividendDesired Years to Double InvestmentAnnual Interest Rate Needed Is…
72÷4=18%
72÷7=10.29%
72÷11=6.55%
72÷15=4.8%

Variations of the Rule of 72

The Rule of 72: What Is It, and How Can You Use It? - SmartAsset (2)

Although the rule of 72 offers a fantastic level of simplicity, there are a few ways to make it more exact using straightforward math. Remember, an 8% interest rate is the most realistic simulation for the rule. For every three points that an interest rate strays from 8%, you can adjust “72” by one in the direction of the rate change. So if the rate is 5%, you would lower the rule to 71. On the other hand, a rate of 11% would result in a shift to 73, and a 14% rate would induce a 74.

The Rule of 72: Modified

Interest RateDifference From 8%Adjusted DividendNew CalculationInvestment Doubles in…
14%672 + 2 = 7474÷ 14=5.29 years
11%372 + 1 = 7373÷ 11=6.64 years
5%-372 – 1 = 7171÷ 5=14.2 years

What if the rule of 72 was actually titled the Rule of 69.3? Well for one, it wouldn’t roll off the tongue nearly as well. In actuality, though, utilizing the latter dividend has proven to offer better projections for those who take advantage of continuous compounding. This likely won’t add very much in terms of interest potential for an investment account. But it can make a small difference.

Banks have increasingly begun to employ daily compounding. This is most often found attached to savings accounts, money market accounts (MMAs) and certificates of deposit (CDs). All three of these account types are generally for long-term usage, so check to see if your bank includes them.

How the Rule of 72Came About

Interest has existed since ancient times in mathematical and economic studies. In fact, it appears to date as far back as the Mesopotamian, Roman and Greek civilizations. The Quran even makes mention of it. Its roots stem from agriculture and the first incarnations of land and money loans.

The first individual to mention the rule of 72, though, is Luca Pacioli, a renowned mathematician from Italy. His impressive book, “Summa de arithmetica, geometria, proportioni et proportionalita” (“Summary of Arithmetic, Geometry, Proportions and Proportionality”), was published in 1494 and holds the first known reference of the rule, making him the closest we know to an inventor. Some credit Albert Einstein as the architect of the rule. There is no documentation to support this claim, though.

The Bottom Line

The Rule of 72: What Is It, and How Can You Use It? - SmartAsset (3)

The rule of 72 can help you get a rough estimate of how long it will take you to double your money at a fixed annual interest rate. If you have an average rate of return and a current balance, you can project how long your investments will take to double. This is an incredibly useful tool for both retirement planning and long-term financial planning in general. Although you’ll also want to use a more in-depth projection method at some point, the rule of 72 can serve as a great starting point.

Investing Tips for Beginners

  • If you’re new to investing, a financial advisor could help you create a financial plan for your needs and goals. Finding a financial advisor doesn’t have to be hard.SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have free introductory calls with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • SmartAsset’s investment calculator can help you determine how your money will grow over time. This can be incredibly helpful to know as you plan out your and your family’s financial future.

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The Rule of 72: What Is It, and How Can You Use It? - SmartAsset (2024)

FAQs

The Rule of 72: What Is It, and How Can You Use It? - SmartAsset? ›

The rule of 72 can help you forecast how long it will take for your investments to double. Divide 72 by the annual fixed interest rate to determine the rate at which the money would double. Historical returns on your investment type can help choose a realistic expected return rate, in some cases.

What is the Rule of 72 How can you use it? ›

The Rule of 72 is a calculation that estimates the number of years it takes to double your money at a specified rate of return. If, for example, your account earns 4 percent, divide 72 by 4 to get the number of years it will take for your money to double.

How can you use the Rule of 72 as a strategy in your own life? ›

Manage Inflation: Beyond investments, the Rule of 72 can help you understand how inflation might erode your purchasing power. By dividing 72 by the average inflation rate, you can estimate how long it'll take for the cost of living to double, aiding in long-term financial planning.

How many years are needed to double a $100 investment using the Rule of 72? ›

Final answer:

Using the Rule of 72, it will take approximately 11.52 years for a $100 investment to double when the interest rate is 6.25 percent per year.

How to double $2000 dollars in 24 hours? ›

Try Flipping Things

Another way to double your $2,000 in 24 hours is by flipping items. This method involves buying items at a lower price and selling them for a profit. You can start by looking for items that are in high demand or have a high resale value. One popular option is to start a retail arbitrage business.

What are the flaws of Rule of 72? ›

Errors and Adjustments

The rule of 72 is only an approximation that is accurate for a range of interest rate (from 6% to 10%). Outside that range the error will vary from 2.4% to 14.0%. It turns out that for every three percentage points away from 8% the value 72 could be adjusted by 1.

How to double 1000 dollars? ›

How Can I Double $1000? If your employer offers a dollar-for-dollar match contribution, you can double $1,000 by investing it in your 401(k). Other than that, there's no easy or risk-free way to double $1,000—you can invest the money in individual stocks, but there will be risks involved.

Does the Rule of 72 really work? ›

The Rule of 72 formula provides a reasonably accurate, but approximate, timeline—reflecting the fact that it's a simplification of a more complex logarithmic equation. To get the exact doubling time, you'd need to do the entire calculation.

Can I double my money in 5 years? ›

As a rate of return, long-term mutual funds can offer rates between 12% and 15% per year. With these mutual funds, it may take between 5 and 6 years to double your money.

How many years does it take to double your money? ›

Very few investors know how long it takes to double their money. Rule of 72 can be of help. Divide 72 by the expected rate of return and the answer is the number of years required to double your money. For example, if a bond offers 6 percent rate of interest per year, then you will double your money in 12 years.

Why is the Rule of 72 useful? ›

What Is the Rule of 72? The Rule of 72 is a simple way to determine how long an investment will take to double given a fixed annual rate of interest. Dividing 72 by the annual rate of return gives investors a rough estimate of how many years it will take for the initial investment to duplicate itself.

How long will it take to increase a $2200 investment to $10,000 if the interest rate is 6.5 percent? ›

It will take approximately 15.27 years to increase the $2,200 investment to $10,000 at an annual interest rate of 6.5%.

Why do investors use the Rule of 72? ›

Using the rule of 72 allows you to have a solid idea of when your investment would double just from the investment rate. Very conveniently, the number 72 divides cleanly into 1, 2, 3, 4, 6, 8, 9 and 12, allowing for a quick and simple division problem instead of your usual compound interest problem.

What is the quickest way to double your money? ›

The classic approach of doubling your money by investing in a diversified portfolio of stocks and bonds is probably the one that applies to most investors. Investing to double your money can be done safely over several years, but for those who are impatient, there's more of a risk of losing most or all of their money.

How to make $10,000 dollars in a day? ›

How to Legally Make $10k in 24 Hours
  1. An investment banker, lawyer, doctor, or other high-paid professional could earn $10,000 in a day.
  2. By closing a big deal or selling many products, a successful entrepreneur could earn $10,000 in a day.
  3. Having good sales skills could result in a $10,000 commission in one day.
Oct 21, 2023

How to invest $100 dollars to make $1 000? ›

How to Turn $100 Into $1,000
  1. Opening a high-yield savings account. ...
  2. Investing in stocks, bonds, crypto, and real estate. ...
  3. Online selling. ...
  4. Blogging or vlogging. ...
  5. Opening a Roth IRA. ...
  6. Freelancing and other side hustles. ...
  7. Affiliate marketing and promotion. ...
  8. Online teaching.
Apr 12, 2024

What are three things the Rule of 72 can determine? ›

dividing 72 by the interest rate will show you how long it will take your money to double. How many years it takes an invesment to double, How many years it takes debt to double, The interest rate must earn to double in a time frame, How many times debt or money will double in a period of time.

What is the Rule of 72 and how is it an easy way to determine quizlet? ›

The Rule of 72 is a formula to approximate the time it will take for a given amount of money to double at a given compound interest rate. The formula is 72 divided by the interest rate earned. In a little over seven years, $100 will double at a compound annual rate of 10 percent (72/10 = 7.2 years).

Can the Rule of 72 be applied to debt? ›

You can also apply the Rule of 72 to debt for a sobering look at the impact of carrying a credit card balance. Assume a credit card balance of $10,000 at an interest rate of 17%. If you don't pay down the balance, the debt will double to $20,000 in approximately 4 years and 3 months. There's a sobering fact.

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