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What is Rule of 72
The Rule of 72 is a simplified formula that estimates how long it takes for an investment to double in value at a fixed annual compound interest rate.
By dividing 72 by the annual interest rate (as a percentage), you quickly get the approximate number of years needed for doubling. This mental math shortcut is widely used by investors to understand the effects of compound interest without needing a calculator.
How the Rule of 72 Works
The Rule of 72 is derived from the compound interest formula and uses 72 because it produces accurate results for common interest rates while being easy to divide mentally.
The Formula:
Years to double ≈ 72 ÷ Annual interest rate (%) Examples: - 6% return: 72 ÷ 6 = 12 years - 8% return: 72 ÷ 8 = 9 years - 9% return: 72 ÷ 9 = 8 years - 10% return: 72 ÷ 10 = 7.2 years
Example: If you invest $10,000 at 9% annual compound interest, the Rule of 72 estimates it will take about 8 years to grow to $20,000. It also works for negative growth: At 4% annual inflation, purchasing power halves in roughly 72 ÷ 4 = 18 years.
Practical Uses of the Rule of 72
Investors use it to compare returns across assets, estimate retirement growth, evaluate the impact of fees, or calculate how quickly high-interest debt can grow.
Who Should Use the Rule of 72
- Beginner Investors To grasp the power of compounding and set realistic long-term expectations.
- Retirement Planners To quickly estimate growth in 401(k), IRA, or other compound-interest accounts.
- People Managing Debt To understand how fast credit card or loan balances can double at high rates.
- Students and Educators As an accessible way to teach exponential growth in finance and economics.
- Everyday Savers To evaluate savings accounts, CDs, or the erosive effect of inflation.
Limitations of the Rule of 72
It is an approximation most accurate for rates between 6% and 10%. Accuracy decreases at very low or very high rates. It assumes constant compounding, ignores taxes, fees, and variable returns. For continuous compounding, the more precise value is 69.3.
Frequently Asked Questions
What is the Rule of 72? ▼
A quick formula to estimate the years needed for an investment to double: divide 72 by the annual compound interest rate in percent.
How accurate is the Rule of 72? ▼
Highly accurate near 8%; reasonably accurate between 4% and 15%; less precise outside that range or with non-annual compounding.
Can I use the Rule of 72 for inflation? ▼
Yes—divide 72 by the inflation rate to estimate when purchasing power will halve.
Why 72 and not another number? ▼
72 provides good accuracy for typical rates and has many divisors, making mental division easy. The exact mathematical constant is approximately 69.3 for continuous compounding.
Does the Rule of 72 work for stock market returns? ▼
It can estimate doubling time using average annual returns, but actual results vary due to market volatility.
How does the Rule of 72 help with debt? ▼
It shows how quickly unpaid high-interest debt doubles, highlighting the urgency of repayment.