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Written by Enoch Omololu, MSc (Econ)
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The Rule of 72 has been around forever and is a very simple way to determine how many years it will take to double your money or the funds invested in your investment portfolio.
If you want a shortcut approach to estimating how compound interest will affect your investment holdings over time, the Rule of 72 is simple enough for the most math-hating individual to utilize.
Literally anyone can crunch the numbers and make financial estimates using the Rule of 72 formula.
How the Rule of 72 Works
To estimate how long it will take you to double your investments, use the formula below:
Time (in years) to double your investment = 72 / r
Where r is the annual interest rate (or expected rate of return) expressed as a whole number.
Example 1: Jake has put $10,000 in an investment that earns 8% per annum. How long will it take him to double his initial investment?
Time required to double funds earning 8% = 72/8 = 9 years
After 9 years, Jake’s initial investment of $10,000 will grow to $20,000.
Using the same scenario above, if we vary the interest rate (rate of return), Jake can expect to double his investment as follows:
- 3% = 24 years
- 4% = 18 years
- 5% = 14.4 years
- 6% = 12 years
- 7% = 10.3 years
- 8% = 9 years
- 9% = 8 years
- 10% = 7.2 years, and so on…
The examples above assume we know the expected rate of return.
What if we don’t know that the interest rate (or rate of return) is, but have an investment timeline in mind for when we want our money to double? We can re-arrange the Rule of 72 formula as follows:
Rate of return required to double investment = 72 / length of time
Example 2: Jake has $10,000 at his disposal and wants to double it in 6 years. What is the rate of return required for him to accomplish his goal?
Rate required to double his funds in 6 years = 72/6 years = 12%
Therefore, Jake needs to put his $10,000 in an investment that pays 12% per annum if he’s to have $20,000 in 6 years.
*Note: As interest rates go higher, the Rule of 72 becomes less accurate. However, it remains good enough to get a rough idea of your expected investment horizon.
Final Thoughts
Although the Rule of 72 is not as accurate as using your scientific calculator or spreadsheet, it remains a superb shortcut to mentally estimate how long it takes to double your money while taking compound interest into consideration.
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Editorial Disclaimer: The investing information provided here is for informational purposes only and is not intended as individual investment advice or recommendation to invest in any specific security or investment product. Investors should always conduct their own independent research before making investment decisions or executing investment strategies. Savvy New Canadians does not offer advisory or brokerage services. Note that past investment performance does not guarantee future returns.
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Author
Enoch Omololu, MSc (Econ)
Enoch Omololu, personal finance expert, author, and founder of Savvy New Canadians, has written about money matters for over 10 years. Enoch has an MSc (Econ) degree in Finance and Investment Management from the University of Aberdeen Business School and has completed the Canadian Securities Course. His expertise has been highlighted in major publications like Forbes, Globe and Mail, Business Insider, CBC News, Toronto Star, Financial Post, CTV News, TD Direct Investing, Canadian Securities Exchange, and many others. Enoch is passionate about helping others win with their finances and recently created a practical investing course for beginners. You can read his full author bio.
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