How to Use the Rule of 72 to Calculate Your Investments

The rule of 72 is a simple way to discern a sum of money’s doubling time through compounding interest. In other words, you can track this kind of exponential growth by dividing the number 72 by the annual interest rate that is relevant to the money involved. This can give you the approximate number of years it could take for the future value of your money to double at the growth rate you provide.

While you can achieve more accurate results through the use of natural logs (or natural logarithms), the rule of 72 is a handy rule of thumb that usually gets you very close to these more precise totals. So long as a given interest rate is somewhere between one to ten percentage points—factoring in decimals as well—you’ll come close to total accuracy. Even if you’re using higher interest rates, you can still get a fairly accurate rough estimate of how long it could take for the present value of your money to double at the annual rate of return.

The rule of 72 stretches all the way back to the Renaissance. One of its earliest known references is in Summa de arithmetica by the Italian mathematician and Leonardo da Vinci collaborator Luca Pacioli.

The rule of 72 is a simple formula—all you have to do is divide a numerator by a denominator. In order to find the years it takes for an amount of money to double (Y), divide the number 72 by the fixed interest rate (I). Written in mathematical terms, it looks like this: Y = 72 / I. Once you get the number of years, you can either multiply or divide that to get a more specific number of time periods.

The rule of 72 can help you map out your own financial goals as well as detect broader trends in the economy as a whole. Here are four things you can calculate using the rule of 72:

1. 1. Credit card payments: You can use the rule of 72 to tell how much you might owe credit card lenders eventually. Divide 72 by your credit card’s interest rate and you can find out how soon the amount you currently owe could double if you don’t charge any additional purchases.
2. 2. Inflation rate: The inflation rate affects the entire economy, and the rule of 72 can help you discover how soon it could affect your money. Once you’ve run the formula according to the current inflation rate, you can see how many years it could take for your money to be worth half as much as it is now.
3. 3. Investments: The rule of 72 can help you determine how quickly you might see a doubled return on investment. Whether you have your money invested in a mutual fund or you’re checking out individual securities on the stock market, plugging in the interest rate for any of your investments can help you see how soon they might double.
4. 4. Savings: The rule of 72 can help you see how quickly the amount you have saved could double. Simply divide 72 by the interest rate for your savings to see how many years it could take to have twice as much as you do now.

All investments and investment strategies entail inherent risks and introduce the potential for financial loss or the depreciation of assets. The information presented in this article is for educational, informational, and referential purposes only. Consult a professional investment advisor before making any financial commitments.

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