We all know the power of compound interest, and the Rule of 72 is a simple and elegant mathematical expression of that concept. It’s also a quick and easy way to figure out how long it will take an investment to double, and the only information you need to make the calculation is a fixed annual rate of return for the investment in question.
How does it work? You divide 72 by the rate of return, and you’ll get a rough estimate of the number of years it will take for your money to double. So, for example, $5,000 invested at 4% would take 18 years (72/4 =18) to become $10,000.
The rule works “in reverse” as well. If you have a certain time period over which you’d like to double your investment, you can use the rule to determine what rate of return you’ll need. For example, if you wanted that same $5,000 to double within a 6 year time period, you’d divide 72 by 6, revealing the need to find an investment with a 12% annual rate of return.
A word of caution: the Rule only provides a rough estimate, and it’s more accurate when it’s applied to lower interest rates. And, of course, it’s best used for quick mental math, and not to guide any major financial decision-making.
You can find a Rule of 72 calculator, plus a calculator that estimates other growth factors, here.
Stephen A. Mendel, Estate Planning Attorney
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