Loading the player...
A:

The 'Rule of 72' is a simplified way to determine how long an investment will take to double, given a fixed annual rate of interest. By dividing 72 by the annual rate of return, investors can get a rough estimate of how many years it will take for the initial investment to duplicate itself.

For example, the rule of 72 states that $1 invested at 10% would take 7.2 years ((72/10) = 7.2) to turn into $2. In reality, a 10% investment will take 7.3 years to double ((1.10^7.3 = 2).

When dealing with low rates of return, the Rule of 72 is fairly accurate. This chart compares the numbers given by the rule of 72 and the actual number of years it takes an investment to double.

Rate of Return Rule of 72 Actual # of Years Difference (#) of Years
2% 36.0 35 1.0
3% 24.0 23.45 0.6
5% 14.4 14.21 0.2
7% 10.3 10.24 0.0
9% 8.0 8.04 0.0
12% 6.0 6.12 0.1
25% 2.9 3.11 0.2
50% 1.4 1.71 0.3
72% 1.0 1.28 0.3
100% 0.7 1 0.3

Notice that, although it gives a quick rough estimate, the rule of 72 gets less precise as rates of return become higher. Therefore, when dealing with higher rates, it's best to calculate the precise number of years algebraically by means of the future value formula.

(To learn more, see Understanding the Time Value of Money.)

RELATED FAQS
  1. What does the rule of 70 indicate about a country's future economic growth?

    Find out more about the rule of 70, what it measures and what it indicates about a country's future economic growth rate. Read Answer >>
  2. How do I use the rule of 72 to estimate compounding periods?

    Find out how and why you can use the rule of 72 to approximate the amount of time it will take for an investment to double ... Read Answer >>
  3. How do I adjust the rule of 72 for higher accuracy?

    Read about the Rule of 72, why it is only an approximation, and how the Rule of 69.3 can be substituted in for more accurate ... Read Answer >>
  4. What is the difference between a company's annual return and its annualized return?

    Understand the importance of calculating a company's annual return and its annualized return, and learn the differences between ... Read Answer >>
  5. How can I use the rule of 70 to estimate a country's GDP growth?

    Find out about the rule of 70, what it is used for and how to use it to determine the number of years a country's GDP takes ... Read Answer >>
Related Articles
  1. Investing

    How To Double Your Money Every 6 Years

    Investing according to the rule of 72 is a good starting point for achieving your saving goals.
  2. Investing

    Rule Of 72

    Learn more about this quick approximation that can determine roughly the number of years it'll take your money to double.
  3. Investing

    It's Time to Re-Examine the Fees You're Paying

    It's simple: The lower your costs, the greater your share of an investment’s return. Here's why it's time to re-evaluate what you pay your advisor.
  4. Insights

    What's a Real Rate of Return?

    A real rate of return is an annual percentage investment return that’s adjusted for inflation, taxes or other factors.
  5. Financial Advisor

    How Trump Could Repeal, Soften Fiduciary Rule

    Donald Trump has threatened to repeal the new fiduciary rule. Here’s what he could do if he wants to kill the rule in its present form.
  6. Investing

    The Days of Rule 48 Are Coming to An End

    A look at the proposal to repeal the controversial Rule 48.
  7. Small Business

    Understanding the Internal Rate of Return Rule

    The internal rate of return rule is a popular method used to compare investments or projects.
  8. Tech

    Advisor Fintech Tools Aren't Waiting for Trump

    The new U.S. president might bring big change to financial regulation after he takes office. Here's how the financial technology sector is dealing.
  9. Insights

    Investment Firms Could Be the Losers in New Fed Rule

    A new Fed rule attempts to prevent another financial crisis by rewriting financial contracts between investment firms and big banks.
  10. Investing

    The Uptick Rule Debate

    This rule was deemed ineffective and repealed in 2007, but critics argue it protects the market from bear raids.
RELATED TERMS
  1. Rule Of 70

    A way to estimate the number of years it takes for a certain ...
  2. Yearly Rate Of Return Method

    More commonly referred to as annual percentage rate. It is the ...
  3. Return

    The gain or loss of a security in a particular period. The return ...
  4. Uptick Rule

    A former rule established by the SEC that requires that every ...
  5. Annual Return

    The return an investment provides over a period of time, expressed ...
  6. Annualized Rate

    A rate of return for a given period that is less than one year, ...
Hot Definitions
  1. Frexit

    Frexit – short for "French exit" – is a French spinoff of the term Brexit, which emerged when the United Kingdom voted to ...
  2. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  3. Down Round

    A round of financing where investors purchase stock from a company at a lower valuation than the valuation placed upon the ...
  4. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  5. Portfolio Investment

    A holding of an asset in a portfolio. A portfolio investment is made with the expectation of earning a return on it. This ...
  6. Treynor Ratio

    A ratio developed by Jack Treynor that measures returns earned in excess of that which could have been earned on a riskless ...
Trading Center