Rule of 72
What is the Rule of 72?
The Rule of 72 is a calculation that estimates the number of years it will take to double your money at a specified rate of return.
To use the Rule of 72, divide 72 by the annual compounded interest rate. When dividing 72 by the interest rate, always write the interest rate as a percentage. If you want to divide 72 by 10 percent, you want to write this interest rate as 10.0, not 0.10. Writing it as 0.10 would indicate an interest rate of only a tenth of a percent, resulting in an entirely different calculation.
The Rule of 72 is a simple alternative to the complex calculation that provides a precise answer concerning the length of time it takes to double an investment. This exact calculation requires logarithmic functions and is not practical for an individual to use unless he or she has a calculator.
Example of the Rule of 72
If you decide to invest or save your money, you want to know how long it will take to double your initial investment so you can compare different products. For example, assume that you have $10,000 that you want to save. You are considering a couple of different options.
Option one is a savings account that pays an annual interest rate of 2 percent and permits limited withdrawals. Your second option is a certificate of deposit that pays an annual interest rate of 3 percent; however, it does not permit early withdrawals unless you pay a penalty.
Using the Rule of 72, you discover that it will take 36 years to double your money with the savings account (72/2). If you chose the CD, it will take approximately 24 years to double your $10,000 (72/3). You don’t plan to use the money for 20 to 25 years, so you decide to purchase the certificate of deposit.
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