Wouldn’t it be great if you could quickly and easily figure out how long it will take your investments to double in value?
Well, with the rule of 72, you can do just that. It’s a simple yet reliable equation that uses your annual rate of return to calculate how long it will be before your money doubles.
What’s more, it can also be applied to all sorts of financial scenarios, letting you simulate the effects of rising inflation or credit card debt on your net worth.
Let’s learn more about this deceptively simple math trick and find out how it can help you manage your money.
The Rule of 72 (Video)
Using the Rule of 72 to Find Out When Your Money Will Double
You don’t need to be a math whiz to use the rule of 72.
It’s one of the most straightforward equations in finance: just divide your interest rate by 72 to get the number of years it’ll take for your investment to double. We can write this out as:
72 / x = y
Where x is your annual interest rate and y is the number of years it’ll take for your money to double.
Let’s say you’ve got some money invested in the S&P 500 index, which has an average annualized return of 9.8%.
72 / 9.8 = 7.34, so this investment will double in value in around 7 years and 4 months.
It’s important to note that the rule of 72 assumes that you’re taking advantage of compound interest by reinvesting any capital gains or dividends you earn on your investment. If you plan to withdraw the interest you earn, you lose the compounding benefits — and you render the rule of 72 ineffective.
Modifying the Rule of 72 for Higher or Lower Return Rates
The rule of 72 is most accurate when interest rates are between 6% and 10%, with the sweet spot being 8%. If your interest rate falls outside that range, you’ll need to do some simple adjustments to get the best results.
It’s easy: for every 3 percentage points your interest rate strays from 8%, add or subtract 1 from 72 before performing the calculation. If it’s higher than 8%, you’ll be adding to 72, and you’ll be subtracting if it’s lower.
Say you decided to make a lower-risk investment with 5% annual returns. 5 is 3 less than 8, so we’ll subtract 1 from 72 to get 71, making our new equation 71 / 5 = 14.2 years to double.
Or maybe you decide to take a big risk on an investment with a 20% rate of return:
20 – 8 = 12
12 / 3 = 4
72 + 4 = 76
76 / 20 = 3.8 years to double your investment
If the difference between 8 and your interest rate can’t be divided squarely by 3, simply round up or down as you normally would. Try it for 22% interest:
22 – 8 = 14
14 / 3 = 4.67 (round up to 5)
72 + 5 = 77
77 / 22 = 3.5 years to double your investment
Taking a little extra time to make these adjustments will greatly increase the accuracy of your results. The further away you get from 8% interest (in either direction), the more necessary the adjustments become.
Double Your Money Every 7 Years (Video)
What If You Don’t Earn Interest Annually?
Although the rule of 72 is typically demonstrated using annual interest, you can still use it even if you earn interest over different durations. You just need to change the duration on both sides of the equation.
For example, let’s say you loaned some money to a friend and you’re charging him 5% monthly interest. First, adjust 72 to 71 (since 5 is 3 less than 8).
71 / 5 = 14.2, so your friend’s original balance would double in just over 14 months.
Other Uses for the Rule of 72
The rule of 72 isn’t just useful for calculating your investment growth. It can also be used to determine the effects of changing interest rates on your savings and debts.
Remember, the rule of 72 relies on interest rates — it doesn’t matter whether that interest works in your favor or not. Any kind of growth that’s measured in percentages will work with the rule of 72.
The Rule of 72 and Inflation
It’s easy to overlook the effects of inflation on your personal finances, but the rule of 72 makes them very clear.
Suppose the inflation rate is currently 2%, and you’d like to find out how long it will take your money to halve in value if it remains at 2%. You’re four simple calculations away:
8 – 2 = 6
6 / 3 = 2
72 – 2 = 70
70 / 2 = 35
Your money will lose half of its value in 35 years.
Using the rule of 72 in this way helps you synchronize your investment strategies with the rest of the economy, lest your growth get swallowed up by inflation.
The Rule of 72 and Debt
Interest on loans and credit cards can really sneak up on you, and nothing demonstrates that better than the rule of 72.
The average interest rate for new credit cards is 17.87%. If you were to carry a balance on a card with this interest rate, the amount you owe would double in approximately 4 years:
17.87 – 8 = 9.87
9.87 / 3 = 3.29 (round down to 3)
72 + 3 = 75
75 / 17.87 = 4.19
And if you took out a new 30-year mortgage with an interest rate of 2.9%, you’d owe double your original balance in around 24 years — less than the original term of your loan!
8 – 2.9 = 5.1
5.1 / 3 = 1.7 (round up to 2)
72 – 2 = 70
70 / 2.9 = 24.13
Applying the rule of 72 to your debts gives you a sobering perspective on the impact of interest. It lets you calculate the amount of time it’ll take for your lender to double their money at your expense — how’s that for motivation to get squared up?