How to Use the Rule of 72 to Double Your Investment (2024)

FAQs

How to Use the Rule of 72 to Double Your Investment? ›

Here's how it works: Divide 72 by your expected annual interest rate (as a percentage, not a decimal). The answer is roughly the number of years it will take for your money to double. For example, if your investment earns 4 percent a year, it would take about 72 / 4 = 18 years to double.

The rule is an easy-to-remember calculation: Simply divide 72 by the annual rate of return for an investment. If an investment has an expected annual rate of return of 6%, that means it can be expected to double in 12 years.

Do you know the Rule of 72? It's an easy way to calculate just how long it's going to take for your money to double. Just take the number 72 and divide it by the interest rate you hope to earn. That number gives you the approximate number of years it will take for your investment to double.

This determines the number of years it will take for your investment to double. For example, if you invest $1,000 and the growth rate is 8 percent, all you have to do is divide 72 by eight, which is nine. That's to say, it will take approximately nine years for your $1,000 investment to become $2,000.

If the interest per quarter is 4% (but interest is only compounded annually), then it will take (72 / 4) = 18 quarters or 4.5 years to double the principal. If the population of a nation increases at the rate of 1% per month, it will double in 72 months, or six years.

Investors can use the Rule of 72 to see how many years it will take to cut in half their purchasing power due to inflation. For example, inflation is currently around 3 percent. You can divide 72 by the rate of inflation to get 24 years until the purchasing power of your money is reduced by 50 percent.

The classic approach of doubling your money involves investing in a diversified portfolio of stocks and bonds and is probably the one that applies to most investors. Investing to double your money can be done safely over several years but there's more of a risk of losing most or all of your money if you're impatient.

The Rule of 72 is reasonably accurate for low rates of return. The chart below compares the numbers given by the Rule of 72 and the actual number of years it takes an investment to double. Notice that although it gives an estimate, the Rule of 72 is less precise as rates of return increase.

Where is the Rule of 72 most accurate? ›

Periodic compounding

written as a percentage. Replacing the "R" in R/200 on the third line with 7.79 gives 72 on the numerator. This shows that the rule of 72 is most accurate for periodically compounded interests around 8%.

Expert-Verified Answer

Under continuous compounding at an annual interest rate of 6.5%, it will take approximately 10.67 years for an initial investment of $1000 to double in value.

The number of years it takes for a certain amount to double in value is equal to 72 divided by its annual rate of interest.

To find the approximate number of years needed to double an investment, divide 72 by the interest rate. In this case, with an interest rate of 6.25%, divide 72 by 6.25, which is approximately 11.52. Therefore, it would take approximately 11.52 years to double the $100 investment.

However, the more precise method to calculate the exact number of years is using the exact doubling time which is 7.27 years, based on compound interest. Therefore, the correct answer to the question of how long it will take to double a $2,000 investement at 10% interest is A. 7.27 years.

Number of years to double the money = 72 / Interest Rate

It is a reasonably accurate formula and more so while using lower interest rates than higher ones. If your money is kept in a savings account that earns just 4%, it will take 18 years to double your money.

By dividing 72 by the annual interest rate, one can quickly determine the approximate number of years required for the investment to grow twofold. This rule is particularly useful for interest rates between 6% and 10%, offering a quick mental calculation for investors and financial planners alike.

Simply put, the Rule of 72 offers a quick and straightforward method for investors to estimate the number of years required to double their money at a consistent rate of return. The formula is simple. You divide 72 by your expected annual rate of return.

By minimizing transaction costs, you retain more of your profits, enhancing the overall return on your investments. Transaction cost and taxes can reduce your net return significantly. Reducing them can help you achieve a higher ROI.