The Rule of 72

 

The Rule of 72 is a quick, mental shorthand used to estimate how long it will take for an investment to double in value, or for the purchasing power of money to halve due to inflation. (I have done this before, but it is a good reminder)

 

The Formula

To find the number of years required to double your money, divide 72 by the annual rate of return (using the whole number, not the decimal): 

 

Examples of Doubling Time

Based on the Rule of 72, here is how long it takes for an investment to double at different rates of return: 

 

·        3% Return: 24 years

·        6% Return: 12 years

·        9% Return: 8 years

·        12% Return: 6 years 

 

Practical Applications

·        Investment Planning: Quickly compare two different assets; for example, a stock portfolio at 9% will double in 8 years, while a bond at 4% takes 18 years.

·        Reverse Calculation: Determine the rate needed to double your money in a specific timeframe by dividing 72 by the number of years. For instance, to double your money in 10 years, you need a 7.2% return (72 / 10)

·        Inflation Impact: Estimate how fast your purchasing power will be cut in half. If inflation is 6%, your money's value will halve in approximately 12 years (72/6)

Accuracy and Limitations

·        Ideal Range: It is most accurate for interest rates between 5% and 10%.

·        Compounding: The rule assumes compound interest rather than simple interest.

·        Alternative Rules:

o   Rule of 69.3: More precise for continuously compounded interest.

o   Rule of 70: Often preferred for lower interest rates or for calculating population growth.

·        Exclusions: It does not account for investment fees, taxes, or market volatility, all of which can significantly delay actual doubling times