The rule of 72 is a simple and quick formula to determine how long it takes you to double your initial investment at a given interest rate.
Years to Double Your Money = 72 ÷ Interest Rate
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Here’s a quick example:
At an interest rate of 6%, an initial investment of $100 would take 72 ÷ 6 = 12 years to double.
This formula also makes it easy to understand how much you expect your investment to grow during a specific period or time horizon.
Imagine you have 36 years to invest money. At a 6% interest rate, that money would double every 12 years, giving you $200 in year 12. After that, it would take another 12 years for the $200 to become $400 in year 24. Finally, by the end of year 36, you would have $800.
If you put your money in the right places, it can grow substantially over time, thanks to the power of compound interest. It could even double, while you don’t have to do a thing.
Want to figure out just how fast your money could grow? The Rule of 72 approximates how many years it will take for your money to double, given a fixed rate of return.
The Rule of 72 as of one of three essential personal finance topics to understand (the other two being compound interest and the time value of money). The Rule of 72 can give you an idea of how many doubles you’ll get in your lifetime. With more time, a lower interest rate may give you enough to nail your goals. With less time, you may need a higher interest rate.
If your money sits in a standard savings account and earns just 0.09% (the average interest rate for savings accounts nationwide), it would take 800 years to double.
If you invest your money in the stock market, whether through an employer-sponsored 401(k) plan, a traditional or Roth IRA, an individual brokerage account or somewhere else, you’ll likely see even bigger returns. The average annualized total return for the S&P 500 index over the past 90 years is 9.8%. Adjusted for inflation, it still comes to an annual return of around 7% to 8%. If you earn 8%, your money will double in a little over 9 years.
You can also use the Rule of 72 to plug in interest rates from credit card debt, a car loan, home mortgage, or student loan to figure out how many years it’ll take your money to double for someone else.
For example, the average interest rate for credit cards is 17.3%. If you divide 72 by that rate, you get 4.16 years. That’s all it takes for a credit card company to earn double your money. The higher the interest rate, the more you’ll owe to your lenders.
If you have debt, look into the possibility of refinancing your car loan or mortgage to get a lower interest rate.
The Rule of 72 is a practical eye opener that forces you to ask shrewd questions before making important money decisions.
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