The rule of 72 is a formula that helps to calculate the time it will take for an investment to double in value. The rule of 72 is a quick and easy way to calculate how many years it will take for an investment to double in value.
The rule of 72 was first introduced by Benjamin Graham, a well-known financial genius who was also the mentor for Warren Buffett. Investors widely use the Rule of 72 to determine how long it will take for an investment to double its value.
This formula can be used when you want to find out how long it will take for your money to double in value or if you want to find out what would be the rate of return on your money if it’s invested for X years, for example; if you invest Rs 100 today and receive Rs 200 after nine years then rate of return on your investment is 8%, i.e., 72/ 9.
What Are the Benefits & Uses of the Rule of 72?
The Rule of 72 has been used for decades in many fields, with the most popular widespread calculating how long an investment takes to double. For example, if you invest Rs 100 at a 10% interest rate, it will take seven years and two months for your investment to double.
This table illustrates the time required to double the money as per Rule 72
| Interest Rates | Rule of 72 |
| 1% | 72 |
| 2% | 36 |
| 3% | 24 |
| 4% | 18 |
The Rule of 72 can also be used backward to learn the rate of return required to double your money in a certain number of years.
So if your goal were to double your money in ten years, you would divide 72 by ten. The result (7.2%) is the after-tax compound annual rate of return you would have to earn to meet your goal on time.
Remember, It’s Just an Estimate
Keep in mind that this is just a quick estimate. Very few investments have a rate of return that stays consistent year after year, so there aren’t many situations where the Rule of 72 can be applied efficiently. Depending on changes in the rate of return over time, what you’re invested in, how you support it, how interest is used, and possible tax implications, the amount of time needed to double your money will vary. The Rule of 72 can be helpful when you quickly want to compare the growth rate of two investments.
Conclusion: Use the Rule of 72
So now you’re wondering when to use the Rule of 72. There are many scenarios where this easy formula can help you—from planning for the future and evaluating an investment to understanding the impact of debt.
- To Plan for Financial Goals
- To Evaluate Investments
- To Better Understand Debt
Just as compound interest works for you when you have money invested, it will also work against you when you have debt.
Say you have credit card debt with an annual interest rate of 36%. Even if you make the minimum monthly payments on that card and don’t spend anything else, the amount you owe will double in 2 years.
So, if you have debt, the Rule of 72 will hopefully light a fire under you to get rid of it as quickly as possible.
