What is the rule of 72?

The rule of 72 is a quick method to determine how many years it would take an investment to double in size, given a fixed annual rate of interest. While online calculators and spreadsheet programs have functions that provide more accurate calculations to precisely time how long it takes to double the invested amount, the rule of 72 can be a quick mental check to gauge an approximate value.

For example:

Emma finds an investment opportunity that pays 10% annual compounded rate of return. She can take 72 and divide that by the annual rate of interest (72/10) = 7.2 years to double her investment.

Or Matt who finds a deal offering 8% annual rate of interest, using the rule of 72 it would take Matt 9 years to double his money.

Other uses for the rule of 72 can be applied to anything that grows at a compounded rate. Some examples would be gross domestic product (GDP), populations, loans, charges, etc.

GDP - Let’s say you’re doing a project on country XYZ, the GDP is growing at 4% annually. That means in (72/4) = 18 years their economy would be expected to double!

Investment Fund Fees – Let’s say a mutual fund charges 2% in annual expenses fees. That means in 36 years the investment principle will be half what it was.

Credit Cards – A borrower who pays an annual interest rate of 24% on their credit cards (or any loan charging compound interest) will double the amount owed in 3 years!

Again these numbers are not exact, however it can give you the ability to quickly run through a deal mentally rather than having to bust out a calculator. This shortcut can help the average individual compare investments, credit cards, etc. The rule of 72 is reasonably accurate for interest rates in the 6%-10% range, when dealing with numbers outside this range there are adjustments. Which is to add or subtract 1 from 72 for every 3 point the interest diverges from 8%. So when running a fee charge of 2% which is 6 points away from 8% you would subtract 72-2 =70 then divide the annual rate of interest 70/2 = 35 years. OR an investment paying 11% annual compounding interest is 3 points higher than 8%, we would add 1 (for the 3 point higher than 8%) to 72+1 = 73 then 73 divided by the rate of return 11% (73/11) = 6.63 years.

Despite all the variations when seriously considering an investment always refer back to a calculator or spread sheet, the rule of 72 is much better for estimations.