If you’re looking to grow your investments, compound interest can work its magic and help you double your money over time. But how do you figure out how long it will take to reach that goal? That’s where the Rule of 72 comes in!
The Rule of 72 is a super helpful formula that investors, both seasoned and beginners, use to estimate how long it will take for their investments to double. Whether you’re putting your money into stocks, a retirement account, or even a savings account, the Rule of 72 can give you a quick idea of the time frame based on your rate of return.
I personally use the Rule of 72 all the time, and if you’ve tuned into my podcast, InvestED, or read any of my books, you’ll recognize how handy this formula is.
It’s easy to understand and simple to use—making it an awesome tool for any investor to have on hand!
What is the Rule of 72?
The Rule of 72 is a quick and simple way to figure out how long it will take for an investment to double, based on a fixed interest rate. It’s a handy shortcut that helps you estimate whether an investment will double your money fast enough to make it worth your while. Once you see how quickly your money can grow, you’ll truly appreciate the power of compound interest.
What is Compound Interest?
Compound interest is the magic behind growing your wealth over time. The longer you leave your money invested, the more it grows.
Here’s how it works: as you earn interest on your initial investment, those earnings get added to the original amount, which then earns even more interest. This creates a snowball effect, where your money keeps growing faster and faster.
It’s a powerful cycle that leads to impressive growth. And the Rule of 72 helps you visualize how quickly your money can grow, all without adding extra money yourself.
Getting Excited About Compound Interest?
Understanding how compound interest can supercharge your investment portfolio is a great motivator to start saving as early as possible—even if you’re starting small. The earlier you begin, the bigger the potential for your money to grow.
The Rule of 72 Formula
You don’t need a fancy calculator to use the Rule of 72—it’s as simple as it gets.
Just divide 72 by the fixed annual rate of return, and you’ll get the number of years it’ll take for your money to double. Here’s the formula:
72 ÷ rate of return = # of years
For example, if your investment earns an annual return of 6%, you’d do this:
72 ÷ 6 = 12 years
So, your money will double in 12 years at a 6% return.
If you’re wondering what rate of return you need to double your money within a certain timeframe, you can rearrange the formula like this:
72 ÷ # of years = rate of return
For more complex calculations when evaluating your investments, feel free to use my investment calculators to help you crunch the numbers.
Examples of the Rule of 72
Let’s break down the Rule of 72 with some simple examples to help you see how it works in real life.
Example 1:
Let’s say your investment earns a 10% annual return. How long would it take to double your money?
Here’s the simple calculation:
72 ÷ 10 = 7.2 years.
So, with a 10% return, your money would double every 7.2 years. Pretty cool, right?
Example 2:
Now, let’s try a 9% return. How long will it take to double your money?
72 ÷ 9 = 8 years.
So, at a 9% annual return, it would take 8 years for your money to double.
Real-Life Scenario:
Now, let’s apply the Rule of 72 to a real-life situation. Imagine you want to double your money in 3 years so you can use it for a down payment on a house.
To figure out the return you’d need, just reverse the formula:
72 ÷ 3 = 24%.
So, to double your money in 3 years, you’d need a 24% return on your investment. Sounds like a big goal, but it’s possible with the right investments!
But let’s say you decide not to buy the house and let the money sit for a few more years. Here’s where it gets exciting: if you keep your money invested for another 3 years, it would double again. After another 3 years, it would double yet again! Let’s see how that works:
If you start with $10,000, after 3 years at a 24% return, you’d have $20,000. In another 3 years, that becomes $40,000, and after another 3 years, you’d have $80,000.
So, in 9 years, with that 24% return, you’ve turned your initial investment into $80,000—eight times more than what you started with.
That’s the magic of compound interest—your money working for you and growing over time! It’s a powerful reminder of how investing can truly build your wealth in the long run.
Drawbacks of the Rule of 72
While the Rule of 72 is a handy tool, it’s important to remember that it’s only an estimation, not an exact science.
Take the earlier example of saving for a down payment on a house with a 24% growth rate. In reality, your investment would double in 3.2 years, not exactly 3 years as the Rule of 72 suggests. While it’s pretty close, it’s not 100% precise.
The Rule of 72 works best when dealing with fixed interest rates around 10%. But as you move further away from that sweet spot, the accuracy starts to drop a bit. So, while it’s great for rough estimates, it doesn’t give you an exact answer, especially when your returns vary.
For investors following Rule #1, the Rule of 72 is a great way to get a general sense of how long it might take to double your money. However, keep in mind that this is most useful for investments that offer a consistent average return. That’s why we focus on investing in strong, undervalued companies with potential for solid, long-term growth—not speculative bets.
To make sure you’re investing wisely, consider using the 4Ms checklist: Meaning, Moat, Management, and Margin of Safety. This helps you identify companies with real potential, reducing risk while maximizing your chances of solid returns.
Also, let’s face it—stocks are not fixed. The stock market can be volatile, and there are no guarantees of steady returns, especially in the short term. This is why we take the time to thoroughly evaluate companies before we invest. That way, we know what kind of average return we can realistically expect over the next 5 to 10 years.
In the end, the Rule of 72 is a great starting point for understanding how your money could grow, but it’s just a rough guide. When investing, make sure to dig deeper and assess the actual potential of your investments for the best long-term results.
When to Use the Rule of 72
Now you’re probably wondering, when is the best time to use the Rule of 72? Well, this simple formula can be a game-changer for a lot of situations—whether you’re planning for the future, evaluating investments, or even understanding the impact of debt.
To Plan for Financial Goals
The Rule of 72 is super useful when you want to figure out how long it will take to hit a financial target. For example, if you want to save up for a big purchase like a home or even a vacation, the Rule of 72 helps you map out the timeline.
Let’s say you want to send your kid to college in 10 years, and you’re hoping to have $100,000 saved up. If you already have $50,000, the Rule of 72 tells you that you’ll need an annual return of 7.2% (72 ÷ 10 years) to meet that goal.
But what if you’re starting with less? If you only have $15,000, you’ll need your money to double 3 times over the next 10 years. This means aiming for a 21.8% return (72 ÷ 3.3 years) to reach your $100,000 target.
The Rule of 72 is especially helpful for retirement planning. Even if you don’t have a huge chunk of money to start with, if you start early, that money can double multiple times over the years. It’s amazing how compound interest works in your favor!
Here’s the key takeaway: The sooner you start saving, the less you need to rely on a big return. But if you’re closer to retirement, you might need a higher rate of return to make up for lost time.
So whether you’re saving for a goal, planning for retirement, or just trying to figure out the best way to grow your money, the Rule of 72 is a powerful tool to help you navigate your financial journey!
To Evaluate Investments
The Rule of 72 is super handy when you’re comparing investments—this is actually how I use it most often.
Let’s say you’re looking at two potential investments: One offers an 18% average annual return, and the other gives you 14%. With the 18% return, your money will double a whole year sooner. Over 15 years, the first option will double nearly 4 times, while the second one will only double 3 times.
When you’re evaluating a company or investment, it’s not about guessing. It’s about using the right tools. My Rule #1 Toolbox, for example, includes calculators that make it easy to project a company’s future value and figure out if its current price gives you a good margin of safety.
👉 You can also use our Rule #1 Calculators to check if a stock is priced in a way that will help you double your money at your target return rate!
To Better Understand Debt
Just like compound interest can work for you when you’re investing, it can also work against you when you have debt.
Imagine you’ve got credit card debt at a 20% annual interest rate. Even if you only make the minimum payments and don’t spend anything else, your debt will double in about 3 and a half years. Yikes, right?
That’s why the Rule of 72 can be a wake-up call if you have debt—it really highlights how quickly things can get out of hand if you’re not careful. So, if you’re in debt, this is the perfect time to take action and pay it off as quickly as you can. It’ll save you a ton in the long run!
