Compound interest is an amazing thing, and the Rule of 72 is a simple way to quickly estimate how long it will take your investment to double. The only piece of information you need for this calculation is the annual rate of return. While most investments don’t have a fixed rate of return over a long period of time, you can use an average estimate to get a pretty good idea.
How to Use the Rule of 72
To estimate how long it takes for your money to double, simply divide 72 by the interest rate. The result is how many years it will take for your money to double at that rate. For example, let’s assume you can earn a 6% rate of return. How long will it take $1,000 to grow into $2,000?
72 / 6 percent = 12 yearsIn this example, if you invested $1,000 into an account that earned a flat 6% annual rate of return, after 12 years, your investment would be worth around $2,000. To save a little time, here are some interest rates and the corresponding amount of time to double:
1% - 72 years
2% - 36 years
3% - 24 years
4% - 18 years
5% - 14 years
6% - 12 years
7% - 10.3 years
8% - 9.0 years
9% - 8.0 years
10% - 7.2 years
11% - 6.5 years
12% - 6.0 years
Remember, It’s Just an Estimate
Keep in mind that this is just a quick estimate. Depending on changes in the rate of return over time, what you’re invested in, how you invest it, how interest is applied, and possible tax implications, the actual amount of time needed to double your money will vary. Even so, the rule of 72 can be helpful when you quickly want to compare the rate of growth of two investments.
The rule of 72 also works in reverse and can be helpful in understanding the power of inflation. If you consider the average long-term rate of inflation is between 3 and 4 percent, you’ll notice that something worth $100 today will cost $200 in about 20 years. This can help illustrate the power of inflation and the importance of realizing a rate of return over time that can not only overcome inflation, but also taxes.
By Jeremy Vohwinkle, About.com
