What is the Rule of 72?

You may recall the article about compound interest, which is when you earn money on interest that you have already earned. It should come as no surprise that the math behind this is complicated. You can do it with a calculator but multi-period compounding can get tricky to do in your head. 

The Rule of 72 is a shortcut, or rule of thumb, for estimating compounding. Specifically, it calculates the time required before an initial principal amount will double based on the rate of return. 

What are rates of return? Why do they matter?

The “return” on an investment refers to the total amount earned as a percent of the investment amount. If you invest $100 in the stock market on January 1 and the value of your investment increases to $110 on December 31, you made a return of $10 on $100 invested, or a 10% return. 

The higher the rate of return on your investments, the more your money will grow over time. 

What is the Rule of 72? 

Here is the math: 

• 72 = Rate of return (%) x number of years before the investment doubles in value

Let’s take an example. If you expect an investment to earn a 9% annual return every year, then how long will it take for the investment to double? 

• 72 = 9 x Number of years
• 72 / 9 = Number of years
• 8 = Number of years
• An investment earning 9% per year is expected to double in value in 8 years

What if that investment made money more quickly? Let’s say the investment is expected to earn 12% per year instead. In that case, it would take 6 years for the value of the investment to double. 

• 72 = 12 x Number of years
• 72 / 12 = Number of years
• 6 = Number of years

Now what if instead we thought that the investment would double over the course of 10 years. Can we figure out the rate of return? Of course!

• 72 = Rate of return x 10 years
• 72 / 10 = Rate of return
• 7.2% = rate of return for the investment to double in 10 years

Does the Rule of 72 actually work? 

Yes, it does a good job approximating the actual exact value! Below is the math for an investment that is expected to earn a 9% return per year. According to the Rule of 72, that initial investment of $100 should be $200 in 8 years. 

After doing the exact math, we get a similar answer. After 8 years of growth at 9% per year, the $100 has increased to $199 in value.