Don’t underestimate the difference that a couple percent could make in the growth of your investment or savings. The rule of 72 is a simplified method of determining the number of years it would take for your money to double at a certain interest rate. It illustrates just how impactful a seemingly slight difference can make in your returns.
Number of Years for Money to Double with X Interest Rate
To use the rule of 72 for a rough estimate of how long it will take your money to double, just divide 72 by the interest rate (without converting it to a decimal). If you’re using it for an account that compounds, be sure you’re using the compound annual growth rate (CAGR) in the case of investing or annual percentage yield (APY) in the case of a savings account that pays interest.
As an example, let’s say you’re earning 3% APY. You would divide 72 by three and get 24, meaning it will take 24 years for money you don’t touch in an account to double due to compounding.
Some other examples per the rule of 72:
• Earning 4% interest, your money would double in 18 years (72/4 = 18).
• Earning 5% interest, your money would double in 14.4 years (72/5 = 14.4). • Earning 6% interest, your money would double in 12 years (72/6 = 12). • Earning 8% interest, your money would double in 9 years (72/8 = 9). • Earning 10% interest, your money would double in 7.2 years (72/10 = 7.2).
Interest Rate Needed for Money to Double in X Years
You can also utilize the “rule” to determine what interest rate you would need for your money to double in a specified amount of time. To do so, you divide 72 by the desired number of years.
For instance, if your goal is to have your money double in a decade, 72/10 = 7.2; you would need a 7.2% interest rate to accomplish this.
For your money to double in one decade, you’d need a 7.2% interest rate, since 72/7.2 = 10.
Caveats and Accuracy
Note that the rule of 72 doesn’t account for taxation or inflation.
Further, though it is quite accurate, it provides a rough approximation. It is most accurate in the 6%–10% range. You wouldn’t want to use it for interest rates higher than 20% or so. For a mathematical explanation of why the rule works, I’ll defer to Business Insider.
The more precise method of find how long it will take your money to double is using the future value formula, using Investopedia’s handy future value calculator. You can also compare the rule of 72 estimates against exact answers using MoneyChimp’s calculators.