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. 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 >>
  2. 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 >>
  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 do I calculate the rule of 72 using Matlab?

    Learn how to calculate years it takes for an investment to double or halve based on the rate of return or inflation using ... Read Answer >>
Related Articles
  1. Financial Advisor

    What Advisors Need to Know About Rule 3210

    Here's what advisors and brokers need to know about FINRA Rule 3210.
  2. 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.
  3. Financial Advisor

    Indie BDs: Trump Should Drop the Fiduciary Rule

    A majority of independent broker-dealers want Trump to repeal the fiduciary rule, a recent survey reveals.
  4. 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.
  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. Insights

    DOL Fiduciary Rule: Everything You Need to Know

    The Department of Labor (DOL) Fiduciary Rule expands the “investment advice fiduciary” definition under the Employee Retirement Income Security Act of 1974 (ERISA) and began to go into effect ...
  7. Investing

    The Uptick Rule Debate

    This rule was deemed ineffective and repealed in 2007, but critics argue it protects the market from bear raids.
  8. Investing

    Calculating Annualized Total Return

    The annualized total return is the average return of an investment each year over a given time period.
  9. 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.
  10. Investing

    The Uptick Rule: Does It Keep Bear Markets Ticking?

    This rule prevents traders from driving stocks down, but its effect on market volatility is debatable.
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. Filter Rule

    A trading strategy where technical analysts set rules for when ...
  4. Four Percent Rule

    A rule of thumb used to determine the amount of funds to withdraw ...
  5. Five Percent Rule

    A regulation that requires a broker to use fair practices and ...
  6. Annualized Total Return

    The average amount of money earned by an investment each year ...
Hot Definitions
  1. Promissory Note

    A financial instrument that contains a written promise by one party to pay another party a definite sum of money either on ...
  2. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
  3. Fixed Asset

    A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be ...
  4. Absolute Advantage

    The ability of a country, individual, company or region to produce a good or service at a lower cost per unit than the cost ...
  5. Nonce

    Nonce is a number added to a hashed block, that, when rehashed, meets the difficulty level restrictions.
  6. Coupon

    The annual interest rate paid on a bond, expressed as a percentage of the face value. It is also referred to as the "coupon ...
Trading Center