The Rule of 72

Whenever you’re dealing with complex numbers, it helps to have a few tricks to make quick calculations easy.  So here’s an easy way to calculate how long an investment will take to double in value using the rule of 72.

What do you need to calculate the rule of 72?

To get an exact amount of time for your investment to double, you would need a compound-interest calculator (there are plenty online or Excel will do it).  But to quickly get to a “close enough estimate” all you need is the annual return on your investment.

An example of the rule of 72

So, let’s say you have $10,000 in your Savings Account and it pays you 10% return after tax per year (spoiler: they don’t… not by a long shot).  How long would it take for your $10,000 to double based on interest alone?

Well, if you withdraw the interest every year, at 10% return, it will take 10 years (obviously).  But through the magic of compound interest, it will take a lot less time.  How much less?  Well, about 2.8 years meaning it takes about 7.2 years to double.

And it turns out that is the magic (approximate) number.

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72 divided by the annual return gives you the approximate number of years it will take to double.

As another example, a return of 9% would take roughly 8 years to double (72 divided by 9 = 8 years).

It's not exact and is just meant as an estimate.  For instance, the true time for a 9% return is 8.04 years but for a quick, back-of-the-napkin calculation 8 years is close enough.

It also gets a little more inaccurate as you approach the extremes.  For instance, an investment with 100% return, takes exactly a year to double, not 0.72 of a year.  But as a very quick, easy formula in most cases, the rule of 72 is great to use.

The Rule of 72 and property

Obviously, this formula isn't just for savings accounts.  Let's say property in your local area has a long term capital growth rate of 5%.  How long would you estimate it will take for your property to double in value (barring some unforeseen market hiccup)?  72 divided by 5 is 14.4 years, so you could expect your property to double in 14 or 15 years time (all things being equal).

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