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 is the difference between the rule of 70 and the rule of 72?

    Find out more about the rule of 70 and the rule of 72, what the two rules measure and the main difference between them. Read Answer >>
  2. What can I use the Rule of 70 for?

    Discover how the rule of 70 works, and learn about some of the different ways it can be applied to future forecasting and ... Read Answer >>
  3. How is the rule of 70 related to the growth rate of a variable?

    Find out more about the rule of 70, what it is used for and how it is related to the growth rate of a variable. Read Answer >>
  4. 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 >>
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

    What is the Rule of 70?

    The rule of 70 is an easy way to calculate how many years it will take for an investment to double in size.
  3. Financial Advisor

    Ready for the Fiduciary Rule? You Should Be

    Despite the opposition it faces, advisors should still plan to comply with the fiduciary rule. Here's why.
  4. 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.
  5. Investing

    Look Smart: Financial Calculations You Can Do In Your Head

    Ditch your financial calculator and use these handy tips for estimating complex financial calculations on the fly.
  6. Financial Advisor

    What Advisors Need to Know About Rule 3210

    Here's what advisors and brokers need to know about FINRA Rule 3210.
  7. Investing

    5 Top Ways to Double Your Investment

    From risky maneuvers to slow-and-steady strategies, we look at five methods to double your money.
  8. Insights

    DOL Fiduciary Rule: Everything You Need to Know

    The Department of Labor (DOL) Fiduciary Rule is a new ruling that expands the “investment advice fiduciary” definition under the Employee Retirement Income Security Act of 1974 (ERISA).
  9. 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.
  10. 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.
RELATED TERMS
  1. Rule Of 72

    A shortcut to estimate the number of years required to double ...
  2. Rule Of 70

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

    More commonly referred to as annual percentage rate. It is the ...
  4. Uptick Rule

    A former rule established by the SEC that requires that every ...
  5. Four Percent Rule

    A rule of thumb used to determine the amount of funds to withdraw ...
  6. Annualized Total Return

    The average amount of money earned by an investment each year ...
Hot Definitions
  1. Block (Bitcoin Block)

    Blocks are files where data pertaining to the Bitcoin network is permanently recorded.
  2. Fintech

    Fintech is a portmanteau of financial technology that describes an emerging financial services sector in the 21st century.
  3. Ex-Dividend

    A classification of trading shares when a declared dividend belongs to the seller rather than the buyer. A stock will be ...
  4. Debt Security

    Any debt instrument that can be bought or sold between two parties and has basic terms defined, such as notional amount (amount ...
  5. Taxable Income

    Taxable income is described as gross income or adjusted gross income minus any deductions, exemptions or other adjustments ...
  6. Chartered Financial Analyst - CFA

    A professional designation given by the CFA Institute (formerly AIMR) that measures the competence and integrity of financial ...
Trading Center