The Rule of 72

The Rule of 72 is an easy way to calculate how long it will take to double investment, assuming constant yearly rate of return (the rule assumes that the rate of return is compounded once a year). Here is how the Rule of 72 works. Divide 72 by the expected yearly rate of return and voila you'll have pretty good approximation of the number of years needed to double your investment. In this first calculation we assumed that we know the rate of return that the investor will get. However the Rule of 72 can be used to answer questions like “What yearly return do I need to have if I want to double my money in 5 years?”. In this case we know the investment term, and we are trying to find out what rate of return do we need in order to achieve our goal. In this case simply divide 72 by the number of years you expect to double your investment in.

Rule of 72 Examples

In our first example Joe wants to know how many years will take to double his $10,000 Canadian dollar investment, if he gets 10% yearly return on his investment. Joe divides 72 by 10, and learns that he'll need approximately 7.2 years to increase the size of his investment to $20,000.

In our second example Joe also starts with an investment of $10,000, but this time he wants to know what annual return of investment does he need in order to double his money in 3 years. To answer his own question Joe divides 72 by 3 and learns that he'll need a 24% per year return of investment to double his money in 3 years.

Keep in mind that the above answers do not take in account taxes on the return of investment, the 10% return in the first example and the 24% return in the second need to be after-tax returns.

Rule of 72 Accuracy

The Rule of 72 is amazingly accurate as long as the rate of return doesn't go over 20%. As you use higher rates of returns the Rule of 72 becomes less and less accurate. The Rule of 72 is a very efficient way to get a quick estimation on how long it will take an investment to double, as long, as your expected rate of return is not over 15-20%.