Understanding the Rule of 72

I had a buddy reach out to me the other day, and we were talking through his finances, retirement planning and something came up that I wanted to share.  I had mentioned the Rule of 72, a little shortcut to calculate how long it takes for your investments, or retirement accounts to double based on a particular rate of return.  This was a new tool for him, and gave him some help in easily seeing future growth of his accounts over time. Seeing where is retirement accounts may be in eight, ten, or perhaps twelve years, for example. 

So, I thought it would be fun to share the Rule of 72 concept, a quick and easy formula that can give you an answer without needing a calculator or a finance degree. Perfect for beginners or anyone in the world of investing, this rule helps you understand the power of compounding interest. In this article, we’ll break down the Rule of 72 in a way that’s easy to grasp, and also include some examples that show you just how versatile and handy this financial shortcut can be

What is the Rule of 72?

The Rule of 72 is a simple mathematical formula used to estimate the number of years required to double the invested money at a given annual rate of return. By dividing 72 by the annual rate of return, investors can get a rough estimate of how many years it will take for their initial investment to grow two-fold.

Why 72? This number is a universal constant in finance that works well with average interest rates and compounding periods, making the math easy enough to do in your head. Plus, it’s remarkably accurate across a wide range of interest rates!

How to Use the Rule of 72?

Using the Rule of 72 is easy with this straightforward formula:

Number of Years to Double = 72 ÷ Interest Rate

Let’s break it down with some examples to see how it works in real life

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