How Long Will it Take My Investment to Double? The Rule of 72
When attempting to quickly estimate the number of years or rate of return required to double an investment, the rule of 72 is a simple tool to use. Simply divide your duration or rate of return into 72.
What is the Rule of 72? Why do we need it?
From time to time, one may want or need to estimate the amount of time it will take for an investment to double at a given interest rate.
The easiest way to get an accurate number is to use a financial calculator or excel to calculate this value. But what if you don’t have one of these devices handy and just want a quick guestimate?
The rule of 72 to the rescue!
The rule of 72 is a method for estimating the number of periods (usually years) it will take to double an investment at a given rate of return by dividing the interest rate into 72.
For example, let’s say you have an investment returning an average of 8% per year and want to know how long it will take the asset to double in value without any further contributions.
By dividing 8 into 72, we get 9 years.
The actual number is 9.006 years which is pretty dang close, hence the usefulness of this quick estimation.
How do you use the rule of 72?
Well, we’ve already seen how it can be used to estimate the period of return, but it can also be used for the inverse.
That is, you can divide 72 by a certain number of years to get the necessary rate of return to double the investment.
So, if you want to know what rate of return you need to achieve in order to double your money in 10 years, simply divide 72 by 10 and arrive at an estimated 7.2%.
(In truth, it would be a shade under 7%, but again this is an estimate. We’ll discuss adjustments in a bit.)
You can also use the formula to estimate how long credit card debt would double or the negative effects of fees in a savings or investment account.
Basically, anything that involves the impact of interest over time.
Adjustments to the rule of 72
The rule of 72 is most accurate right around that 8% rate. The further you move away (up or down) the less accurate the outcome.
You can account for this difference to some extent by adding or subtracting to or from 72 for every 3rd percentage point above or below 8%.
For example, if you had a rate of return of 11%, you could add 1 to 72 and divide it into 73 for greater accuracy. At 14%, use 74. At 17%, use 75, and so on.
Going the opposite direction, simply subtract from 72. So, at 5%, you’d use 71 instead.
The rule of 72 also works best with annual compounding. If you’re calculating based on a continuous interest rate, you’ll get more accurate results by dividing it into 69.3 instead.
