Understanding the Rule of 72: A Key to Investment Growth (2024)

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• The Rule of 72 is a mathematical formula that estimates how long it will take an investment to double in value or to lose half its value.
• To calculate the Rule of 72, you divide the number 72 by the rate of return of an investment or account.
• The Rule of 72 can only be used on investments earning compound interest; it's most effective on interest rates between 6% to 10%.

Investing in the stock market can be intimidating, but taking that first step can be a great way to build wealth for yourself. You can ensure you're staying on track to meet your goals by understanding how to project the growth of your assets when building a portfolio.

With the Rule of 72, it's as easy as plugging numbers into a simple formula to determine how long your investment will take to double.

Here's what you need to know about how it works and why it's a key tool to keep in your investing toolbox.

What is the Rule of 72?

The Rule of 72 is a mathematical principle that estimates the time it will take for an investment to double in value. You take the number 72 and divide it by the interest earned on your investments each year to get the number of years it will take for your investments to grow 100%. It can also calculate how your investment will fall.

Using the Rule of 72 for investment growth offers a quick and easy way for investors to judge whether they are on track to meet their goals. Applying the rule of 72 to inflation calculations shows you how quickly you can double your money with minimal effort; this rule beautifully demonstrates the magic of compounding for building wealth.

Remember that you can only apply this rule to compounding growth or decay. In other words, this formula can only be used for investments that earn compound interest, not simple interest. With simple interest, you only earn interest on the principal amount you invest.

It doesn't have to be investment interest as anything that increases your principal benefits from compounding interest. For example, if you reinvest the dividends you earn on your investments, your earnings are compounded. Therefore, the Rule of 72 applies.

On the other hand, if you choose to withdraw your dividends rather than reinvest them, your earnings might not compound, and the Rule of 72 wouldn't work.

The formula behind the Rule of 72

To calculate the Rule of 72, you must divide the number 72 by the rate of return. Estimating doubling time with the Rule of 72 is simple. You can use the formula below to calculate the doubling time in days, months, or years, depending on how the interest rate is expressed.

For example, if you input the annualized interest rate, you'll get the number of years it will take for your investments to double.

You'll notice the formula uses the "approximately equals" symbol (≈) rather than the regular "equals" symbol (=). That's because this formula offers an estimate rather than an exact amount, and it's most accurate when used on investments that earn a typical rate of 6% to 10%.

Examples of the Rule of 72

Let's say you invest $1,000 at a 10.5% annual rate of return, which is the average stock market return for the last 10 years. To calculate the doubling time using the Rule of 72, you'd input the numbers into the formula as follows:

72 / 10.5 ≈ 6.8

This means your initial $1,000 investment will be worth $2,000 in about 6.8 years, assuming your earnings are compounding. If you instead invest $10,000, you'll have $20,000 in just under seven years. This also means that $20,000 will double again in another seven years, assuming the same growth rate — in other words, you'll have $40,000 in less than 14 years.

This also assumes you're not adding to your initial investment over time.

The rule of 72 can also be used in reverse to find the annual interest rate you need to double your investments in a specified number of years. For example, say you wanted to double your investment in six years, you would divide 72 by six to get 12. Therefore, you would need to invest in an asset with a 12% annual rate of return for it to be doubled in approximately six years.

The importance of the Rule of 72 in financial planning

The Rule of 72 in financial planning can help guide you toward making smart investing decisions to ensure you're on track to reach your goals — whether that be savings for retirement, buying a house, planning a wedding, or education expenses.

Applying the Rule of 72 to various investment types

Since mutual funds and index funds have generally predictable rates of return, you can apply the Rule of 72 to these securities to estimate how long it will take for your investment to double in value. For example, if you invest in an index fund that mimics the Dow Jones — which generally has an average annual rate of return of around 11.14% — the formula would be:

72 / 11.14 ≈ 6.5

An investment of $1,000 would take approximately 6.5 years to double.

"From a personal standpoint, I believer it's wiser to use lower, realistic numbers for financial projections," says Barbara Pietrangelo, CFP and financial planner at Prudential Advisors. "Life happens. Clients can always spend more, but if you over-project, it is difficult to make up that money."

The Rule of 72 can also be applied to savings accounts, such as the best online high-yield savings accounts. For example, a Wealthfront Cash Account offers a 5.00% APY. When you plug that info into the Rule of 72 equations, you'll get 14.4. So, you can conclude that it will take about 14.4 years to double your investment.

On the other hand, stocks don't have a fixed rate of return, so they aren't compatible with the Rule of 72.

Limitations of the Rule of 72

The Rule of 72 offers a quick and easy way to calculate investment growth and is best when used as a rule of thumb to guide your investing strategy. But remember that the Rule of 72 is an estimation rather than a precise calculation. It's fairly accurate for calculating compound interest and rates of return. However, there's no guarantee that your investment will double by the estimated time, especially if the rate of return changes.

The Rule is the most accurate on steady rates, but it doesn't consider trading fees and expenses.

"Unexpected expenses arise — cars break, people get ill, and children may need financial support," says Pietrangelo. "Portfolio projections that are high are rarely accurate."

Beyond doubling: Using the Rule of 72 for other financial calculations

While usually used to estimate the doubling time on a growing investment, the Rule of 72 can also be used to estimate halving time on something that's depreciating. The formula works the same either way — simply plug in the inflation rate instead of the rate of return, and you'll get an estimate of how many years it will take for the initial amount to lose half its value.

For example, you can use the Rule of 72 to estimate how many years it will take for a currency's buying power to be cut in half due to inflation. It can also be used to calculate how many years it will take for the total value of a universal life insurance policy to decline by 50%.

Adjusting the Rule of 72 for different rates of return and inflation

The number 72 is a good estimator in most situations, and thanks to it being an easily divisible number, it makes for simple math. It's best for interest rates, or rates of return, between 6% to 10%. Most investment accounts, including retirement accounts, brokerage accounts, index funds, and mutual funds, fall into this return range. You can also make adjustments to the Rule of 72 for accuracy.

But with a different range, you might want to fiddle a bit — same formula, but different numbers to divide by. An easy rule of thumb is to add or subtract "1" from 72 for every three points the interest rate diverges from 8% (the middle of the Rule of 72's ideal range).

For example, using the number 78 will give more accurate results at high interest rates. On the other hand, 69 or 70 are more accurate for lower interest rates and interest that compounds daily. Daily compounding is rare in investing and mostly happens with savings products such as high-yield savings accounts and certificates of deposit (CDs).

The Rule of 72 FAQs