While the idea of compounding interest is great, it’s not always convenient to perform the calculation of:

Total = Principal * (1 + interest rate) ^ # of years of your investment

Although this calculation is relatively simple, I don’t necessarily want to pull out my calculator when thinking about the implications of having my money somewhere that earns 3% vs 7%.  For everyday use, I rely heavily on the Rule of 72.  This formula is not exact but is the perfect solution for situations where you do not want get hung up in the details and an estimate will do.

The rule of 72 tells you how long it will take to double your money for any investment return.  If your investments are earning 9% it will take you 72/9, or 8 years to double your money.

72 = Investment return * # of years it will take you to double your money

The rule of 72 can help you with two basic questions:

1) If my money earns X, how many years will it take to double my money?

# of years = 72/investment return

So if your investment earns 7.2% it will take 10 years to double  your money.  Whereas if  your investment earns 8% it will only take 9 years to double your money.

Used in this manner you can compare return expectations for different investment options.

2) If I want to double my money in Y years, what investment return do I need to earn?

Let’s say you are 50 and have $500,000 in the bank.  You want to have $1,000,000 by the time you retire in 15 years at age 65, so what return do you need to receive on your investment?

Required return to double money = 72 / # of years

So in this example it you will need 72/15 or 4.8 percent, to double your money by the time you are 65.

Unfortunately this formula will not tell you if that return expectation is realistic or prudent.  However, if your $500,000 is expected to earn only 3% over the next 15 years, you know you either need to save more, wait longer to retire (72/3 = 24 so you will need to wait 9 more years) or adjust your investments to have a higher expected investment return.

As a final note for those of you advanced person finance students out there.  This formula assumes interest is compounded annually.  Most interest in continuously compounded.  However, for back of the envelope calculations this formula works great.

*Photo by ericmcgregor

* I’ve been wanting to add a ‘reader profile’ feature for awhile now.  Please contact me (notrustfund <at> gmail <dot> come) if you have any interest in being profiled.  Free Money Finance started reader profiles a few months ago and posted one last week that I particularly enjoyed.

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3 Responses to How Long Will It Take To Double Your Money? The Rule Of 72

  1. DreamChaser57 says:

    Thanks for clarifying the mysterious “Rule of 72″. I’ve heard it referenced in the PF blogosphere and it was just assumed that everyone will know what that meant.

    Also, in the latter part of your post – it states….
    (72/3 = 24 so you will need to wait 9 more years)

    I get the divisor is 3 because that’s the rate of return. I also get that 72/3 equals 24. What I am not wrapping my brain around is how that means you would have to wait 9 more years. Can you explain that please?

    • notrustfund says:

      Thanks for your comment DC57. In the original example you were 50 wanting to retire at 65, or 15 years from now. If it now is going to take 24 years to reach your retirement goal you have to work for 24-15 more years, or 9. Hope this helps!

  2. Yes the Rule of 72 is a handy tool but as you state it has its limitations. One good thing about it is that it proves the obvious in that the more principal you have the less risk you need to take since your return on investment can be lower. The implication here is that the quicker you can build principal the better off you are in reaching your goals and as time goes by you need not take as much risk as you may have done earlier.

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