Sundaymail Editor
The Rule of 72 is an easy way for an investor or advisor to approximate how long it will take an investment to double, based on its fixed annual rate of return. Simply divide 72 by the fixed rate of return, and you’ll get a rough estimate of how long it will take for your portfolio to double in size.
The science isn’t exact, though, and you may want to use a different formula to account for rates of return that fall outside a certain range.
What Is the Rule of 72?
The Rule of 72 is a rule of thumb that investors can use to estimate how long it will take an investment to double, assuming a fixed annual rate of return and no additional contributions.
If you want to dive even deeper, you can use the Rule of 115 to determine how long it will take to triple your investment.
Both of these rules of thumb can help investors understand the power of compound interest. The higher the rate of return, the shorter the amount of time it will take to double or triple an investment.
How to use the rule of 72 to estimate returns
Let’s say you have an investment balance of $100,000, and you want to know how long it will take to get it to $200,000 without adding any more funds. With an estimated annual return of 7 percent, you’d divide 72 by 7 to see that your investment will double every 10,29 years.
Grain of Salt
The Rule of 72 is easy to calculate, but it’s not always the right approach. For starters, it requires a fixed rate of return, and while investors can use the average stock market return or other benchmarks, past performance doesn’t guarantee future results. So it’s important to do your research on expected rates of return and be conservative with your estimates.
Also, the simpler formula works best for return rates between 6 percent and 10 percent. The Rule of 72 isn’t as accurate with rates on either side of that range.
For example, with a 9 percent rate of return, the simple calculation returns a time to double of eight years. If you use the logarithmic formula, the answer is 8,04 years—a negligible difference.
In contrast, if you have a 2 percent-rate of return, your Rule of 72 calculation returns a time to double of 36 years. But if you run the numbers using the logarithmic formula, you get 35 years—a difference of an entire year.
As a result, if you’re looking to just get a quick idea of how long your investment will take to double, use the basic formula.
What is the Rule of 72 used for?
The Rule of 72 is a quick formula you can use to estimate the future growth of an investment. If you know the average rate of return, you can apply a simple formula to determine how long it will take to double your investment, assuming you don’t put more money into it.
Who invented the Rule of 72?
The earliest known reference to the Rule of 72 comes from Luca Pacioli’s 1494 book, “Summa de Arithmetica.”
This book went on to be used as an accounting textbook until the mid 1600s, granting Pacioli the title of the Father of Accounting.
When does money double every seven years?
To use the Rule of 72 to figure out when your money will double itself, all you need to know is the annual rate of expected return. If this is 10 percent, then you’ll divide 72 by 10 (the expected rate of return) to get 7,2 years. Use this same formula to figure out the return on other investments by diving 72 with the expected annual rate of return.
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