What’s the Rule of 72 in Investing?

The Big Picture On the Rule of 72 in Investing:

• The Rule of 72 is a simple formula to estimate how long it takes an investment to double: Years to double = 72 / rate of return.
• Variations like the Rule of 70 or 69.3 can be used for more accuracy at different return rates.
• While not 100% precise, the Rule of 72 is a useful quick estimation tool for compound growth calculations.

Compounding returns are critical to building wealth. For example, if you invested $250 a month in a mutual fund earning the average historical stock market return (around 10.5%), you’d be a millionaire in under 36 years.

But not everyone sits around all day playing with compound interest calculators. Sometimes, it helps to have a shorthand rule of thumb.

Enter the Rule of 72.

What’s the Rule of 72 in Finance?

To calculate how long it will take an investment to double, you can just divide 72 by the return you expect to earn.

For instance, if you expect a 10% return, you can expect your money to double within 7.2 years or so: 72 / 10 = 7.2.

Not exactly advanced calculus, is it?

The Rule of 72 isn’t precisely accurate. But it’s very close for back-of-the-napkin calculations — at least for common returns ranging from 6-10%. More on variations of the Rule of 72 in investing later.

Formula for the Rule of 72

The formula for the Rule of 72 is pretty simple:

Years to double = 72 / rate of return on investment (ROI)

Another example: If you expect to earn 8% on an investment each year, then it would take 9 years for your initial investment to double: 9 = 72 / 8.

Note that you enter the ROI as a number, not a decimal of 1. So, instead of using 0.08 to express 8%, you just use 8.

You don’t have to use whole numbers, either. If you invest in the real estate crowdfunding platform Streitwise, which pays an 8.4% annual dividend yield, you could expect to double your money in 8.6 years (8.6 = 72 / 8.4).

Also, remember that the Rule of 72 in finance doesn’t consider additional contributions. It only calculates the time period for a one-time initial investment to double if the returns are reinvested.

Finally, the Rule of 72 assumes that the return compounds annually. It’s less accurate for investments that compound monthly, quarterly, or semiannually.

Impact of Compounding Frequency on the Rule of 72’s Accuracy

For a better picture, here’s a table illustrating how the Rule of 72 becomes less accurate for investments that compound more frequently than annually, at 8% return.

Uses of the Rule of 72 in Investing

As noted above, the Rule of 72 can be used to determine how long it will take for an investment to double.

That’s especially useful if you’re thinking about CoastFI. For non-FIRE nerds (FIRE: financial independence, retire early), CoastFI refers to building up a nest egg quickly, then not investing another cent until you’re ready to retire. (Read more about the steps to financial freedom here.)

So, for example, you might save up $500,000 in a sprint, then stop saving, secure in the knowledge that your investments will compound over time, and deliver a juicy enough nest egg by the time you want to retire. The Rule of 72 suggests that your $500,000 will double to $1 million in 7.2 years if you earn a 10% return. If you’re happy with that nest egg, you could retire or leave it for another 7.2 years to double again to $2 million. Leave it for another 7.2 years, and you’d have $4 million.

That exponential growth shows the power of compound interest.

You can also use the Rule of 72 in investing to determine the annual rate of return you’d need for your investment to double within your target time frame. So, you tweak the formula to divide 72 by the number of years you want your money to double in.

Say you want your investment to double in just five years — by the Rule of 72, you’d need to earn a 14.4% return (72 / 5 = 14.4%). You now have a target return in mind, which will help you decide where to park your money.

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Limitations of the Rule of 72

The Rule of 72 is a shorthand quick calculation, not the exact formula. The true formula for how long it takes an investment to double is:

T = ln(2) / ln(1+r)

“T” is the time it takes the investment to double, “ln” stands for natural log function, and “r” is the compounded rate of return. Dust off your scientific calculator and high school math for that one.

Still, the Rule of 72 in finance is accurate, especially for rates of return between 6-10%. Here’s a breakdown courtesy of the Corporate Finance Institute:

At 1-2% interest rates, the calculation is off by a year or more. But returns between 3-6% or above 10% are only off by a few months.

If you want a more precise calculation without breaking out your high school logarithmic math, try a few variations on the Rule of 72.

Variations on the Rule of 72

You can tweak 72 as your base number for a more accurate calculation that you can still do on a cocktail napkin after throwing back a few.

Set 8% as your standard rate of return, and for every 3 percentage points above or below 8%, add or subtract 1 from 72. For example, if you find a rental property that earns 11% cash-on-cash returns (3 points higher than 8%), use 73 instead of 72 in the formula: 73 / 11 = 6.64 years to double.

Alternatively, if you expect to earn 5% on an investment, drop the base number to 71, so the formula reads: 71 / 5 = 14.2 years. At a 2% annual interest rate, use 70 as your base (“Rule of 70”).

At low return rates under 2%, use 69.3 as your base number. Investors sometimes call this the Rule of 69.3 or 69 if you want to round down for a simpler calculation.

Here’s a further chart showing how variations stack up to the Rule of 72 and the real numbers:

Lastly, remember that the real-time time it takes to double your current balance with daily or continuous compounding strays further from the Rule of 72 results, which are designed to estimate annual compounding.

Applying the Rule of 72 to Understand Inflation’s Impact

Every investor should understand the effects of inflation on their investments—that should be standard. 

Luckily, you can divide 72 by the current inflation rate to see how long it’ll take for your money to lose half its value. This back-of-the-napkin calculation can give you a clearer picture of how rising prices might chip away at your savings over time.

Let’s look at some numbers. If inflation is around 6%, the Rule of 72 shows that money’s purchasing power will be cut in half in about 12 years. Now, increase that rate to 9%, and the same thing happens in just 8 years—pretty eye-opening, isn’t it?

Understanding these timeframes helps investors—like you and me—make smarter calls about our financial roadmaps. For the same reason, financial advisors better employ the Rule of 72 to illustrate the importance of outpacing inflation through wise investments—though that’s a bit out of the topic. 

Final Thoughts On The Rule Of 72

The Rule of 72 was first published in 1494 by Luca Pacioli. His textbook, “Summa de Arithmetica,” earned him the title “Father of Accounting” and was used for centuries to teach the discipline.

So, you’re in good hands using it to run rough numbers for how long your investment will take to double.

Besides, stock and real estate returns aren’t 100% predictable. The variation in returns from year to year is enough to throw off the calculation more than the Rule of 72’s discrepancies. Long-term average rates of return are all good, but in the real world, annual returns bounce all over the place, so tweak your timeframe.

The important thing is to start investing and put your dollars to work for you rather than vice versa.♦

How do you come up with your own rough estimates for how long it will take to reach your financial goals?

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