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's a good forex strategy to use when spotting a Wedge-shaped Pattern?

    Find out more about the rising and falling wedge formations and how to implement a forex strategy when you spot these patterns ...
  2. What's the most accurate way to find out a nation's nominal GDP?

    Learn about easy-to-use and most reliable sources for finding a country's nominal GDP data and which sources contain the ...
  3. What are the different formations of yield curves?

    Find out more about the yield curve and yield curve formations, what yield curves measure and the three main types of yield ...
  4. Can small investors buy collateralized mortgage obligations (CMOs)?

    Read about collateralized mortgage obligations and their relationship with small investors, plus what risks small investors ...
RELATED TERMS
  1. Bid Wanted

    An announcement by an investor who holds a security that he or ...
  2. Hindsight Bias

    A psychological phenomenon in which past events seem to be more ...
  3. Paper Trade

    Using simulated trading to practice buying and selling securities ...
  4. Financial Exposure

    The amount that one stands to lose in an investment. For example, ...
  5. Bid And Asked

    A two-way price quotation that indicates the best price at which ...
  6. Compound Net Annual Rate - CNAR

    The return on an investment after taking tax implications into ...

You May Also Like

Related Articles
  1. Economics

    Tech Startup Momentum Being Generated ...

  2. Active Trading Fundamentals

    Who are Charles Schwab's (SCHW) main ...

  3. Investing Basics

    Here's How To Tap International Markets

  4. Investing News

    Looking To Invest In U.S Start-Ups? ...

  5. Investing Basics

    How a Stock Buyback Works: MasterCard

Trading Center