What is the Rule of 72?

How long will it take to double your investment? As experts are wont to caution, there are no guarantees in investing, but one useful formula can offer an approximation of what the future might hold.

The “rule of 72” is a way to calculate how long it will take to double your money in an investment that offers a steady annual rate of return. This formula is an easy and quick way to estimate investment gains.

The rule of 72 can be a tangible way for investors to grasp the power of compounding, says Andrew Briggs, a wealth manager with Plaza Advisory Group in St. Louis. Compounding refers to the way your investment returns accelerate over time because you earn interest on both your principal investment and on the interest you’ve already accumulated. “Understanding compounding is huge, so that’s why I think the rule could be so helpful.”

That said, there are various caveats to the rule of 72 that limit its real world applicability and you should be mindful of these factors if you want to incorporate it into investment planning. Here’s what you need to know.

What is the rule of 72?

The rule of 72 is a mathematical formula you can use to calculate how long it will take for an investment to double in value, presuming it has a steady annual rate of return. The rule is an easy-to-remember calculation: Simply divide 72 by the annual rate of return for an investment. If an investment has an expected annual rate of return of 6%, that means it can be expected to double in 12 years.

The rule of 72 is “really great as a rule of thumb,” notes Cat Irby Arnold, a Seattle-based financial advisor at U.S. Bank Private Wealth Management. It’s a quick, easy tool, but because it doesn’t take into account future contributions, dividends, fees, capital-gains taxes or inflation, it doesn’t tell the full story of investing. “Use it as a guide, not as a gospel.”

The rule of 72 has been around a long time—in fact, it dates back to the 15th century—and it’s most commonly used in investing. The accounting shortcut has broader applicability, and particularly as inflation and interest rates have hit multi decade high levels in recent years.

Assuming a set rate of inflation, for example, you can use the rule of 72 to calculate how long it will take to lose half of your purchasing power, notes Michael Berkhahn, a certified financial planner at Graham Capital Wealth Management in Tampa. Similarly, you could use the rule to calculate how quickly credit card debt or student loan debt will double in size if you don’t pay down the balance, he adds. “There are some unique ways you can use the rule of 72.”

How to calculate the Rule of 72

You need to know only one data point to use the rule of 72: the expected annualized rate of return for an investment. With this information, you can calculate the number of years it will take for that investment to double in value. The formula is:

• 72 ÷ expected rate of return = the number of years for investment to double in value

It’s most accurately used when considering investments with a steady and fixed rate of return, including bonds or certificates of deposit. It’s also most accurate for investments with annual rates of return ranging from about 5% to 10%, though it can be used for a rough estimate outside of that range. 

The rule is best used as “a quick, back-of-the-envelope type of calculation,” Berkhahn notes..

Example of the Rule of 72

As interest rates have gone up in recent years, that’s made fixed-income assets more attractive to investors—and that’s where the rule of 72 has additional applicability. To appreciate how this rule may be beneficial in forecasting future returns, consider the following three examples, based on currently available rates:

• A high-yield savings account that’s paying an annual percentage yield, or APY, of 4.5% will double in value in 16 years.
• A U.S. Treasury bond with a yield of 5.3% will double in value in about 13 years and 7 months.
• A certificate of deposit, or CD with an APY of 6.0% will double in value in 12 years.

These examples illustrate how a relatively small difference in return can shave off months, if not years, in the length of time it will take for an investment to double in value. The problem with applying the rule of 72 is that these types of fixed income investments offer a guaranteed rate of return for only a specified period, Briggs notes. A CD with a 6.0% rate may mature after only one year, for example, and that’s much shorter than the 12 years it will take to double in value. 

As a result, applying the rule’s money-doubling calculation may not be very precise. Consider that one-year CD, for example. When the CD matures, there’s no guarantee you’ll be able to reinvest that money at the same rate of return and it could be lower. “Be very careful as far as what the maturity schedule is of that fixed income product or strategy,” Briggs adds.

How Accurate is the Rule of 72?

The rule of 72 is fairly accurate, as calculations go, particularly for rates of return within that range of about 5% to 10%. Beyond that range, it’s less precise—and its real world applicability is made all the more problematic by the nature of investment returns. 

“The rule of 72 would be more accurate the more steady the rate is,” Arnold notes. But most investments don’t offer a guaranteed rate of return for a fixed period, which makes the rule tricky to use because returns can change daily for some investments, she adds. “It’s going to be less accurate, the more fluctuations you get in the rate, so stocks are going to be harder to pin down a rule of 72 on.”

Beyond the rule being too simplistic for many investing situations, the calculation only factors in compounding interest and is based on nominal returns. Nominal returns don’t adjust for investment fees, trading costs, expenses, and taxes, which are “by far, the biggest drag” on performance, Briggs notes. “If you are using that rule as a strong guideline, try not to get too fixated on it.”

Berkhahn adds that the rule is best used as an approximation. “It’s not a set guarantee.”

Alternatives to the Rule of 72

For investments with rates of return beyond that 5% to 10% range, there are other formulas that can more accurately estimate how long it will take to double the value. There are a variety of other formulas—including the rules of 69, 70, 71, and 73—though the two most viable alternatives are the rule of 71 and the rule of 73. These are slight variations of the rule of 72, just using different numerators for the calculation. 

The rule of 71 is a more accurate alternative to the rule of 72 for fixed rates of return that are below about 6%, Berkhahn notes, while the rule of 73 is more reliable for rates above about 10%. These rules work quite similarly to the rule of 72, though using the rule of 71 slightly speeds up the money-doubling calculation and the rule of 73 slows it down. 

How to use the Rule of 72 in investment planning

Even though the rule of 72 isn’t a perfect formula for calculating your investment performance, it can help you with investment planning. That’s because you can use the rule as a guide when defining realistic financial goals and choosing investments that match your risk tolerance.

One of the most valuable aspects of the rule is quantifying how long it takes for an investment to double in value can be eye-opening, in both a good and a bad way, according to Arnold. For example, some investors find it “shocking” to learn that it takes 14-plus years to double an investment with a 5% return, she notes. “It really does make you realize that rate of return is important.” 

Just as you can’t expect the rule of 72 to guarantee when your investment will double in value, you can’t expect to achieve a specific rate of return year after year, Briggs advises. The value of the rule is fairly limited in a practical sense, given the caveats and reasons to be cautious about relying on it as a forecaster of future performance, he adds. 

Still, the rule of 72 can help investors think about risk tolerance and why it’s important to ride out periods of volatility in markets—and visualizing potential returns can be a powerful motivator, particularly for younger investors who have time on their side, Briggs says. Doing so can snap some investors into action and spur them to invest more money, Arnold adds. “Getting started early is on your side because that’s where the power of compounding kicks in and you really can’t ever make up for that time.”

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