What is the Rule of 72?
The Rule of 72 is a shorthand method to estimate the number of years required for an investment to double in value (2x).
In practice, the Rule of 72 is a “back-of-the-envelope” method of estimating how long it would take an investment to double given a set of assumptions on the interest rate, i.e. rate of return.
How the Rule of 72 Works (Step-by-Step)
The Rule of 72 is a convenient approach to approximate how long it will take for invested capital to double in value.
In order to figure out the number of years it would take to double an investment, 72 is divided by the investment’s annual return.
The calculation is more so a rough estimate – i.e. “back of the envelope” math – that provides a relatively accurate figure.
For a more precise figure, using Excel (or a financial calculator) is recommended.
The Rule of 72 is well-known in finance and perceived by most as a general rule of thumb to estimate the number of years that it would take an investment to double in value.
Yet, in spite of the simplicity of the calculation and the convenience, the methodology is rather accurate, within a reasonable range.
Rule of 72 Formula
The formula for the Rule of 72 divides the number 72 by the annualized rate of return (i.e. the interest rate).
Thus, the implied number of years for the investment’s value to double (2x) can be approximated by dividing the number 72 by the effective interest rate. However, the effective interest rate used in the equation is not in percentage form.
For example, if an investor decided to contribute $200,000 to an active investor’s fund.
According to the firm’s marketing documents, the normalized return should range around 9% approximately, i.e. the 9% is the set return targeted by the fund’s portfolio of investments over the long term (and various economic cycles).
If we assume the 9% annual return is in fact achieved, the estimated number of years for the original investment to double in value is roughly 8 years.
- n = 72 ÷ 9 = 8 Years
The Rule of 72 Chart: Implied Number of Years to Double
The chart below provides the approximate number of years for an investment to double, given a rate of return ranging from 1% to 10%.