Use the Rule of 72 to Understand Compound Interest

The Rule of 72 is an Easy Way to Calculate How Long it Takes for Your Money to Double

If you want to quickly determine how long it will take for your money to double, the rule of 72 is all you need. Most people generally understand the concept of compound interest, knowing that over time, interest earned will begin to snowball and accumulate more rapidly. Even though it is a relatively simple concept, visualizing how it works can be more difficult.

I think Albert Einstein said it best:

Compound interest is the greatest mathematical discovery of all time.

So, what is the Rule of 72 and what does it have to do with compound interest? The rule simply states that if you divide 72 by the interest rate, it will tell you how long it takes for your money to double. For example, assume you earn a 6% rate of return on your money. To find out how long it takes for your initial amount of money to double, just do the simple calculation: 72 / 6 percent = 12 years.

It doesn’t matter if you have a starting balance of $500 or $50,000, if you earned a real rate of return of 6% each year, you will double your money after 12 years.

Table of Returns

Rule of 72This table should highlight the importance of squeezing the most out of your money. If you notice, your checking or savings account at the bank earning 1%, by keeping your money there and you’ll need 72 years to double it. But, if you can manage to even get 3% on that money, you can shave 48 years from that goal. Even a modest 7% return will allow you to double your money in just over 10 years.

Even more impressive is when you consider the higher rates of return. For instance, if your investments are in the market during 5 good years and you can realize around a 14% return, you will double your money in that same period.

The Big Picture

For most people, the number of years to double your money seems like a long time. Even at a modest 7% return, that’s just over 10 years. Well, it may seem like a long time, but this is where you have to really take into account the power of compounding over the long term.

Let’s use an example of a 25 year old who has $10,000 saved up in a retirement account. For simplicity, let’s say that the account is earning 7.2% per year, so according to the Rule of 72, the money will double every 10 years.

Rule of 72 v. 2As you can see, it starts out kind of slow. By age 35, it might not feel like much to have $20,000 saved up. But as the decades pass, the numbers accelerate in value as they double, to a point where by retirement, a measly $10,000 has turned into over $150,000. Money begets more money over time.

Also keep in mind, this is simply using a single lump-sum with no additional money being saved. When you consider that most people would be continuously adding money to this investment, the rate of compounding goes up significantly.

Some Caveats

Keep in mind that the Rule of 72 is just a guideline. Clearly, in the real world you’ll almost never have a constant interest rate unless your investment is in a long-term fixed income vehicle. In addition, you will want to consider the impact of taxes and inflation on your results. This rule is simply a tool to help illustrate the impact that time and rate of return has on your money.

Remember, time can be either your greatest asset, or your worst enemy. The sooner you start, even if by just a small amount, it will provide more time for your money to compound. On the other hand, every passing week, month, or year is time that you can never get back. It is up to you to decide if you want time to be on your side or working against you.

Author: Jeremy Vohwinkle

My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.

16 comments
4818swt
4818swt

I thought the rule of 72 was as follows as above so if you take 72/12   12 being your % gain you get 6 so your money doubles 6 times. Than take the age you want to retire at minus your age 65 - 33 = 32  take 32 yrs / 6 = 5.33 or 5 so your money will double 5 times right? So if your 72/72 is 1 that means your money will double every year 72/72 = 1 33/1 = 33 so your money will double 33 times before you retire.

watsup
watsup

ever wonder getting 72% per year. Using rule 72, 72/72 = 1.
So let's put $1000 as a start, 1000*1.72 = 1720 which is not even double, that should of $2000. ????
Care to comment.

Ron Rice    S.A.G.E.
Ron Rice S.A.G.E.

THE RULE OF 72 IS HELPFUL FOR US AS WE TALK WITH 7TH AHD 8TH GRADERS ABOUT THE RISKS AND SERIOUS CONSEQUENCES OF CASUAL GAMBLING, ESPECIALLY GAMBLING ON THE INTERNET IN THE QUIET OF THEIR HOMES.

WHEN A TEEN GETS THE SAVING HABIT AT A YOUNG AGE, GAMBLING THEIR MONEY AWAY AT "ROCKET SPEEDS" IS NOT AN OPTION FOR THEM.

GAMBLING IS NOT EDUCATION FRIENDLY!! THE MORE WE EDUCATE MIDDLE SCHOOL YOUTH ABOUT SMART MONEY MANAGEMENT THE LESS THE PROBALIBILITY THEY WILL START TO GAMBLE,

RON RICE, FOUNDER
S.A.G.E. (STUDENTS AWARE OF GAMBLING EXCESSES)
636-485-1445

thehungrydollar.com
thehungrydollar.com

While I've seen the numbers before, I really like the "Table of Returns." I'm very visual and it really puts things in perspective...

Adfecto
Adfecto

The rule of 72 is pretty nice. I also like a graph that has two lines. One shows the balance of an investment account and the other shows the tally of contributions. The contributions are a simple line with a slow upward slope and the balance takes off like a rocket as compound interest works its magic. Most people understand things much better in graphical form than in words or numbers.

Eric Toya - LWM Blog
Eric Toya - LWM Blog

The rule of 72 is an amazing piece of math, isn't it? I once volunteered for a program that taught finance basics to high school kids in low income neighborhoods. They didn't get the concept of compounding interest until I used the rule of 72.

Of course, it has its limits. If you earn 72% in one year, you will not have doubled your money.

Sandra Z Ciaramitaro
Sandra Z Ciaramitaro

I liked the subject matter, but mostly how you explained saving and went thru the process. Very sound advice.

Ted
Ted

Compound interest is indeed a miracle of finance. If I'd have only paid more attention to my father's advice about saving early.

I've seen the numbers work out that if you save $2k/year from age 18-24 (6 years) that money will compound into more money at retirement than if you save $2k/year for the next 40 years until retirement.

Kevin
Kevin

Einstien also said that "compound interest is the most powerful force in the universe."

hank
hank

It's amazing how nicely it works - the downside to being young though is that you DON'T know about investing (generally). But it really is amazing!!!

Jeremy
Jeremy

Ryan, that is exactly right. It isn't rocket science, yet until you see the possible outcomes that a few years can make, it doesn't always sink in. And what sucks about time is that you can't make any more of it. Once you let 5 years go by before saving, or investing, or whatever, you can't make that time up. It is gone forever, so unless you want to wait another 5 years at the end of life to delay in using that money, it is time that is completely lost.

That's why it doesn't matter if you can only save 5 bucks a month or 500, every little bit, as soon as possible can and does matter. I meet with so many people who think that since they can't save a lot, they might as well not save at all. That is the wrong attitude that will only come back to bite you later in life.

Ryan
Ryan

Great post! So, to summarize, time is an investor's best friend. Obviously the earlier you start, the more money you will have when you retire, but the differences in just a few years are enormous.

Jeremy
Jeremy

Swamproot, that's right, there are a few other rules of thumb you can use as well. Good link to mention the others as well.

And that's right TDG, investing isn't rocket science, yet people do their best to make it more complicated than it has to be. Obsessing over a difference in 20 basis points, trying to build a bulletproof portfolio, and timing the market all typically create more stress than anything. The bottom line is: save money, invest it prudently, and give it time to grow. Compound interest will eventually work its magic.

The Dividend Guy
The Dividend Guy

I like this post because it highlights that fact that investing is not rocket science. Often we get so mired in the details we forget to take a step back and break things down to their basics.

Thanks.

Swamproot
Swamproot

I had heard of the Rule of 72 for a long time, but only recently came across the rule of 114 & 144, that use a similar approximation for tripling and quadrupling money at a particular rate as well.

AFM had a post about it awhile back. The post.