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In a nutshell
The Rule of 72 is a financial shortcut that allows investors and others to estimate the amount of time that it will take an investment to double in value.
- The rule assumes annual compounding of the rate of return.
- Alternatively, if you know the amount of time that it will take the investment to double in value you can use the rule to compute the compounded annual rate of return.
This rule is a quick and easy way for investors to look at the potential returns on an investment they may be considering. It doesn’t replace the use of more complex and detailed calculation tools, but it helps give an investor a quick idea of the return that an investment might create for them and can offer a quick analysis of the returns of various investing strategies they may be considering.
How the rule of 72 works
The formula for calculating the time for and investment to double under the rule of 72 is:
72 divided by the compound annual interest rate equals the time it takes for the investment to double.
The classic example of how the rule works is to look at an interest bearing investment like a bank savings account or CD. Assuming a set rate of interest on the account, the rule of 72 will provide an estimate of how long it would take to double their money in the account.
For example, if a savings account has an annual rate of 5%, 72 divided by 5 is 14.4, so the investment would be expected to double in value in 14.4 years.
Examples
The examples below show the number of years that it would take to double your money at various interest rates.
| Interest rate | Years to double |
|---|---|
1.0% | 72 |
2.0% | 36 |
3.0% | 24 |
4.0% | 18 |
5.0% | 14.4 |
6.0% | 12 |
7.0% | 10.2 |
8.0% | 9 |
9.0% | 8 |
10.0% | 7.2 |
The table implicitly assumes that the interest rate stays constant and the money in the account is allowed to compound over time.
Another way to look at the rule of 72 is to look at the rate of return needed to double your investment over a varying number of years:
| Number of Years | Rate of return needed to double your investment |
|---|---|
1 | 72% |
2 | 36% |
5 | 14.4% |
10 | 7.2% |
Using the rule of 72 in your investment planning
There are a number of ways you can use the rule of 72 in your investment and financial planning.
Looking at the impact of investment returns
If you are looking to invest money, the rule of 72 can be a useful tool to estimate the impact of different potential rates of return. For example, if you are looking to invest $50,000 in a mutual fund you might want to see how long it would take to double the value of your investment at different rates of return.
As discussed above, in the case of an investment like a mutual fund the rule of 72 can be a good estimating tool, but the variance in annual returns seen in many mutual funds means your estimate is subject to more variation than with an investment like a CD that generally has a fixed rate of return over time.
Accumulating money for a goal
If, for example, a parent is looking to accumulate money for their child’s college expenses, they might want to work out what rate of return they will need to reach a target. In this example, we will assume that the parent has $30,000 saved towards this goal and they have roughly eight years until the child starts college. If they are looking to double this amount within this eight year period, they can use the rule of 72 to calculate that they would need to earn a 9% return on this money.
Analyzing a portfolio
For an investor with a number of holdings in their portfolio, they can do an estimate of the annual returns on each holding. They could then use the rule of 72 to see how long it would take each holding to double in value.
They could then take a weighted average of their portfolio based on the relative value of each holding to come up with an estimate of how long it would take for their entire portfolio to double in value.
Note this example is an estimate at best, but that this analysis could be insightful as to the impact that certain holdings have versus others in the portfolio.
How accurate is the Rule of 72?
The Rule of 72 is as accurate as the information used. The formula does work, which you can see if you use it on an account with a fixed, set rate of return. A CD or a bond with a fixed interest rate that is purchased and held to maturity are good examples. The more variable the interest rate (or rate of return), though, the less accurate the rule becomes.
The rule of 72 can be a good tool to estimate potential changes in value or rates of return on an investment you may be considering, but the actual return will depend upon the investment’s actual return.
A good example of this is a stock mutual fund. You might be looking to invest in the mutual fund and want an estimate of how much your investment could be worth in five or ten years, based on an assumption of what the fund’s investment returns might be.
The difference between trying to use the rule of 72 to estimate the increase in the value of a fixed rate investment vehicle like a CD versus something like a mutual fund is that the mutual fund’s annual returns could vary widely around an average annual period over a set time period.
At the end of 2023, the Vanguard 500 Index Fund (ticker VFINX) had an average annual return of 15.53% for the five year period ending December 31, 2023. During that five-year period, the annual returns ranged from a high of 31.33% in 2019 to -18.23% in 2022. The timing of these returns had a profound impact on the five-year average returns.
This will always be the case with investments whose returns can vary widely from period to period.
Rule of 72 vs. the Rule of 73
The rule of 72 tends to work best with interest rates and rates of return between 6% and 10%. This isn’t to say it isn’t useful at other levels, however. It’s also important to remember this is just an estimating tool: it is not meant to be a precise calculation tool.
For rates of interest or rates of return that diverge plus or minus three percentage points from the 8% midpoint of the range, the rule of 72 can be adjusted by adding or subtracting one (1) to or from 72. For example, the rule of 73 would kick in for an interest rate of 11% which is three percentage points higher than the 8% midpoint.
Under this scenario, using the rule of 72 would tell you that an investment with an 11% projected return would double in approximately 6.55 years (72 divided by 11). Using the rule of 73 would yield a timeframe of 6.64 years to double their investment with a projected 11% annual rate of return (73 divided by 11).
Using another example, if the interest rate were to increase to 20%, then the rule of 76 would kick in. Under this scenario using the rule of 72, a 20% increase would result in your investment doubling every 3.6 years. Using the rule of 76 would show the investment doubling every 3.8 years. While these results are not radically different, using these adjusted rules can help make the estimate a bit more precise.
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The AP Buyline roundup
The rule of 72 is an easy to use tool to estimate the time it would take an investment to double in value based on a given interest rate or a rate of return. It's important to note that the rule assumes the returns will be compounded.
You can also flip this around to estimate the return needed to double an investment over differing periods of time.
It’s important to note that the rule of 72 will not always yield a precise answer. This is especially true if it is being used in a case where the investment returns can vary over time. Nonetheless, it is a handy rule of thumb that can help in your investment planning.
Frequently asked questions (FAQs)
Can the rule of 72 help me calculate the impact of inflation on my purchasing power?
This is actually an excellent use of this tool. For example, if you believe that inflation will run at a 3% rate, at this pace your purchasing power would be cut in half in 24 years. If the inflation rate increased to 5%, then it would take 14.4 years for your purchasing power to be cut in half.
How exact is the rule of 72?
The rule of 72 will likely be more accurate if you are dealing with an investment or savings vehicle that has a fixed rate of return. While you can use the rule to estimate the time to double an investment, or the rate of return needed to double an investment over a period of time, if the investment returns are variable and unpredictable the rule will provide a less precise estimate.
AP Buyline’s content is created independently of The Associated Press newsroom. Our evaluations and opinions are not influenced by our advertising relationships, but we might earn commissions from our partners’ links in this content. Learn more about our policies and terms here.