What is the Rule of 72?
The Rule of 72 is a formula often used to quickly estimate the time or interest rate needed to double an investment having annual compounding growth.
Since the formula used to calculate the exact time or interest rate involves natural logarithms, and therefore usually requires a calculator or spreadsheet function to solve, the Rule of 72 gives a close approximation with simple math that can be performed in your head.
It's important to note that the closer the interest rate is to 8%, the closer the estimated doubling time will be to the exact doubling time.
How to Calculate Rule of 72
To calculate the number of years needed to double your investment, you would use the Rule of 72 formula shown as follows:
|Number or Years||=||72|
For example, if your investment is earning 8% annually and you want to know how many years it will take double, you would plug the number 8 into the above formula.
|Number of Years||=||72|
|Number of Years||=||9|
To calculate the interest rate needed to double your investment within a given number of years, you would use the Rule of 72 formula shown as follows:
|Number of Years|
For example, if you want to know what annual interest rate will cause your money to double in four years, you would plug the number four into the preceding formula.
Rule of 72 Chart
The following chart shows how close the Rule of 72 formula comes to matching the exact number of years.
|Interest Rate||Estimated Years to Double||Exact Years to Double|