Investment Doubling Time: Understanding the Rule of 72

The Rule of 72 is a simple and useful tool that can help investors estimate the time it takes for their investments to double in value. This rule of thumb is widely used in finance and investment planning, providing a quick and easy way to calculate the potential growth of an investment.

What Is the Rule of 72?

The Rule of 72 is a shortcut or rule of thumb used to estimate the number of years required to double your money at a given annual rate of return. It can also be used to determine the annual rate of return needed to double your money within a specific time frame.

The Formula for the Rule of 72

The formula for the Rule of 72 is:

Number of Years to Double = 72 / Annual Rate of Return

Annual Rate of Return = 72 / Number of Years to Double

This formula allows investors to quickly calculate the doubling time of an investment based on its annual rate of return or vice versa.

How to Use the Rule of 72

Using the Rule of 72 is straightforward. First, determine the annual rate of return or interest rate of your investment. Then, divide 72 by the annual rate of return to calculate the approximate number of years it will take for your investment to double.

For example, if you have an investment with a 10% annual rate of return, the Rule of 72 can estimate that it will take approximately 7.2 years (72 / 10) for your investment to double in value.

Who Came Up With the Rule of 72?

The exact origin of the Rule of 72 is unknown, but it has been widely used in finance and investment circles for many years. It is a simple and convenient way to estimate the doubling time of an investment without the need for complex calculations.

How Accurate Is the Rule of 72?

The Rule of 72 provides a rough approximation of the doubling time of an investment. It is not exact, but it is generally accurate for annual rates of return between 5% and 20%. For rates of return outside this range, the Rule of 72 becomes less accurate.

What Is the Difference Between the Rule of 72 and the Rule of 73?

The Rule of 73 is similar to the Rule of 72 but uses the number 73 instead. The Rule of 73 provides a slightly more accurate estimate for doubling time, especially for higher rates of return.

Key Takeaways

• The Rule of 72 is a shortcut used to estimate the time it takes for an investment to double in value.
• The formula for the Rule of 72 is: Number of Years to Double = 72 / Annual Rate of Return.
• The Rule of 72 is a rough approximation and becomes less accurate for rates of return outside the range of 5% to 20%.
• The Rule of 73 is a slightly more accurate alternative to the Rule of 72.