The Rule of 72 is a formula that helps you approximate how long it will take for an investment to double in value. It isn’t an exact science, but it can help you visualize your financial future. Simply divide the number 72 by the fixed rate of return, and that’s the rough estimate for how long it will take for your money to double.
Keep reading to learn more about how to use the rule of 72 and how you can adjust it to fit your investment strategy.
What Is The Rule Of 72?
The Rule of 72 is an easy way for investors and advisors to help plan for retirement, education plans, and any other long-term financial goals. It was created by the Italian mathematician Luca Pacioli in 1494, so we know it’s tried and true. The formula looks like this:
Years to Double = 72 / interest rate (or rate of return on investment)
Keep in mind that market volatility is a real thing, so that the calculation won’t be perfect. The economy is constantly changing, so the stock market’s average annual return will differ depending on when you use the Rule of 72.
For example, if the stock market currently has a return of 10%, then you divide 72/10, showing that your investment would take about 7.2 years to double at this rate of return. Most experts find this formula to be the most accurate with an 8% return rate.
Rule Of 72 Example
Whether math is your strong suit or not, anyone can estimate their financial future with the Rule of 72. Let’s use this example to show you how. Perhaps you have an investment balance of $100,000, and you want to predict how long it will take you to get $200,000 (without adding any more money into your bank account).
If the current estimated annual return is 8%, then you simply divide 72 by 8 to see that it would take about nine years for your investment to double.
How To Use The Rule Of 72 Into Your Investment Strategy
The Rule of 72 can apply to anything that grows at a compound rate. This includes charges, loans, and even demographic figures like population. For instance, if the country’s Gross Domestic Product (GDP) or the total market value of all finished goods and services produced within a country’s borders during a specific time period–is growing at 4%, then the economy would be expected to double in 18 years.
74 / 4% = 18 years
The Rule of 72 can also be used to show the long-term effects of the costs of investment gains. A mutual fund that charges 3% annual expense fees will decrease your investment principle to half in about 24 years.
72 / 3% = 24 years
Or a borrower who pays 12% interest on their loans or credit card will double the total amount owed in six years.
72 / 12% = 6 years
This rule can also be used during times of inflation. If inflation is about 6%, then the current purchasing power of the dollar will be worth half that in nearly 12 years.
72 / 6% = 12 years
When planning to invest, keep in mind that interest is added to the principal amount that you invested. This is called compound interest. It’s a huge benefit of investing because you’re essentially earning interest on top of interest, which is very important for things like retirement savings.
To plan for the future accordingly, let’s use an example of a 401(k). If you’ve invested $50,000 into your retirement funds with an expected 8% return, divide 72 / 8. That will indicate you have about nine years until that $50K doubles for your retirement. Knowing this rough estimate will greatly help you plan for your future.
How The Rule Of 72 Can Vary
The Rule of 72 is a good rule of thumb to follow, but it’s not always a fast and hard rule. While it’s easy to divide 72 by a fixed rate of return, you need to research the actual expected rates of return and then probably be conservative with your estimates.
Plus, past performance in the stock market doesn’t guarantee anything. The economy is constantly shifting. And keep in mind that this formula only works best for return rates between 6% and 10%. But it’s helpful if you’re looking for a quick idea of how long your investment will take to double in size.
If you need a more specific gauge for big plans like an educational savings plan or retirement, you may want to use the logarithmic equation instead. This formula tends to be more accurate for long-term planning.
Consult With An Investment Professional
The Rule of 72 is a beneficial tool for estimating when your financial investments could double in worth. You could also use the formula to calculate the exact opposite–how many years it would take for your cash to lose its purchasing power during times of inflation. Either way, there are variations to this rule that could be more accurate, but it’s a pretty solid tool to have in your back pocket.
It’s important to remember that you have other concrete financial information that will help you plan for the future. Your credit score is probably the most important factor in your ability to access financing. So we always advise you to check that when you’re planning ahead.
An investment professional is also a great resource when planning for big financial steps. Check out our investment services page to connect with someone who can help you plan a strategy that will best work for you.
