What Is the Rule of 72?
The Rule of 72 is a simple formula used to estimate how long it will take for an investment to double in value at a fixed annual rate of return. It’s a handy mental shortcut for investors, especially beginners, because it avoids complex calculations. The SEC even includes it in financial literacy materials.
Key Takeaways
- Quick Estimation: Calculates doubling time for investments using a fixed return rate.
- Best for 6–10% Rates: Most accurate within this range.
- Broad Applications: Applies to GDP growth, inflation, loan interest, and fees.
- Variations Exist: Rules of 69, 70, or 73 may be better for extreme rates or continuous compounding.
Formula for the Rule of 72
There are two primary ways to use the Rule of 72:
- Years to Double:
72 ÷ Expected Rate of Return
Example: An 8% return doubles your money in ~9 years (72 ÷ 8 = 9). - Expected Rate of Return:
72 ÷ Years to Double
Example: Want to double your money in 6 years? You’d need a ~12% return (72 ÷ 6 = 12).
Fast Fact
The Rule of 72 assumes compound interest, not simple interest. Compound interest grows your investment exponentially by earning returns on both the principal and accumulated interest.
How to Use the Rule of 72
The Rule of 72 applies to any exponentially growing metric:
- GDP: A 4% growth rate doubles the economy in ~18 years.
- Inflation: At 6% inflation, money loses half its value in ~12 years.
- Fees: A 3% annual fee halves your investment in ~24 years.
- Debt: A 12% interest credit card debt doubles in ~6 years.
👉 Learn more about compound interest
Historical Context
First documented in 1494 by Luca Pacioli in his book Summa de Arithmetica, the Rule of 72’s origins remain unclear—Pacioli provided no derivation.
Calculating the Rule of 72
Example:
If an investment earns 8% annually, divide 72 by 8: 72 ÷ 8 = 9 years to double.
For a $1,000 investment:
- $2,000 in 9 years
- $4,000 in 18 years
- $8,000 in 27 years
Accuracy
The Rule of 72 is approximate. For exact results, use the logarithmic formula: T = ln(2) ÷ ln(1 + r)
Example: An 8% return actually takes ~9.006 years to double.
Rule of 72 vs. 73
- Adjust for Extreme Rates: Add/subtract 1 for every 3% the rate diverges from 8%.
Example: For 11% (3% > 8%), use Rule of 73:73 ÷ 11 ≈ 6.64 years. - Continuous Compounding: Use 69.3 for daily/continuous interest.
FAQ Section
1. Can the Rule of 72 be used for debt?
Yes! Divide 72 by your debt’s interest rate to see how quickly it could double if unpaid. A 20% APR credit card debt doubles in ~3.6 years.
2. What’s the main limitation of the Rule of 72?
It’s less accurate for rates outside 6–10%. For extremes, use Rules of 69, 70, or 73.
3. Does inflation affect the Rule of 72?
Absolutely. At 6% inflation, purchasing power halves in ~12 years. If inflation drops to 4%, this stretches to ~18 years.
👉 Explore investment strategies
The Bottom Line
The Rule of 72 is a versatile tool for investors and borrowers alike. It underscores the power of compounding—and the dangers of high-interest debt. Use it to plan long-term goals or gauge the impact of fees and inflation on your wealth.