The Rule of 72
Double Your Money
The Rule of 72 is a formula to estimate how long it will take for an investment to double in value based on the interest rate it earns. It is calculated by dividing 72 by the annual interest rate. This rule of thumb helps investors understand the power of compound interest and make informed decisions about their investments.
- Compound interest can significantly increase the value of an investment over time.
- The Rule of 72 provides a quick estimate of how long it will take for an investment to double in value.
- Understanding the Rule of 72 can help investors make informed decisions about their investments.
- Determine the Interest RateDetermine the annual interest rate of the investment. This can be found in the investment's documentation or by contacting the investment provider.Pro tipUse the nominal interest rate, not the effective interest rate, for the calculation.WarningThe Rule of 72 is an estimate and actual results may vary.
- Apply the Rule of 72Divide 72 by the annual interest rate to estimate how long it will take for the investment to double in value.Pro tipUse a calculator to perform the calculation.WarningThe result is an estimate and actual results may vary.
Example 1
An investment with an annual interest rate of 10% will double in value in approximately 7.2 years, according to the Rule of 72.
OutcomeThe investment will be worth twice its initial value in approximately 7.2 years.
Using the Wrong Interest Rate
Using the wrong interest rate can lead to inaccurate estimates. Make sure to use the nominal interest rate and not the effective interest rate.
Not Considering Compounding Frequency
The Rule of 72 assumes annual compounding. If the investment compounds more frequently, the actual result may be different.
The origin of the Rule of 72 is not well-documented, but it is believed to have been in use since the 19th century. It is a simple and effective way to estimate the effects of compound interest on investments.
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