Understanding the Rule of 72

What Is the Rule of 72?

The Rule of 72 is a quick, useful formula that is popularly used to estimate the number of years required to double invested money at a given annual rate of return. While calculators can find the precise time, the Rule of 72 is handy for mental calculations to quickly gauge an approximate value.

How to Use It

The formula is simple: divide 72 by the annual rate of return to find out how many years it will take for your investment to double. For example, if an investment has an 8% annual compounded rate of return, it will take approximately 9 years (72 / 8 = 9) to double the money.

• It applies to compounded interest, not simple interest.
• It can also be used for anything that grows exponentially, like GDP or inflation.
• It can show the long-term effect of fees. A fund with a 3% annual fee will cut your principal in half in about 24 years (72 / 3 = 24).

How Accurate Is It?

The Rule of 72 is reasonably accurate, especially for interest rates between 6% and 10%. It's a simplification of a more complex logarithmic formula. For daily or continuous compounding, using 69.3 instead of 72 gives a more accurate result. For rates far from the 6-10% range, other variations like the Rule of 69 or Rule of 73 can be more precise.