Unless you have a degree in finance, work on Wall Street, or are some kind of professor, it can be really easy to feel intimidated when people throw out phrases like “investment portfolio” or “bear market.” But you don’t have to be a fancy-schmancy finance professor to invest or even know what the stocks are doing on Wall Street. All you have to know is what you’re investing in and when you might actually start doubling your money. That’s called the rule of 72. Let’s break it down.
What Is the Rule of 72?
The rule of 72 is a math problem used in the world of investing. It helps you figure out—without having to use a calculator—how long it will take for your money (or investment) to double itself. Most investment professionals use compound interest formulas and other fancy math stuff like logarithms to figure out the exact same thing.
How Does the Rule of 72 Work?
The rule of 72 is pretty simple really. Here’s how it works:
72 / interest rate = number of years
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Divide 72 by the interest rate on the investment you’re looking at. The number you get is the number of years it will take until your investment doubles itself.
Easy enough right? Here’s a real-life example:
Let’s say you’re meeting with your financial advisor to talk about retirement investing. You decide to start investing in some good growth stock mutual funds. But as you’re looking at all the options, you want to know just how many years it will take you to double your investment of $3,000. One fund has an interest rate of 6%. So, using the rule of 72 (72 divided by 6), you’ll double your investment in 12 years. Not bad, huh?
Is the Rule of 72 Accurate?
“It’s a rough and dirty way to do investment math quick in your head. It’s not perfect, but it does work.” — Dave Ramsey
Here’s the thing, the rule of 72 is actually fairly accurate. But the best part is that you can do the math (most likely) in your head. So instead of working on compound interest formulas and worrying about logarithms and scientific calculators, you can put the rule of 72 to use and get close to the same answer—without all the extra work.
But if you’re in a situation where you need the exact number, you’re better off using a compound interest formula. (You’d better believe you’re going to need a calculator for this.)
Here’s the formula:
Got it? Just kidding. We wouldn’t leave you to figure that one out by yourself. In the formula, “FV” means future value, “PV” is present value, “r” is the annual interest rate (written as a decimal), “m” is the number of times per year interest is compounded per unit, and “t” is the number of years you leave the money invested. Whew.
Using the example above, let’s see how this compares to the rule of 72. So:
The rule of 72 had you doubling your investment in 12 years. That’s about $98 off. But that’s still really close—especially if you didn’t want to put in the extra work. Want to try it out for yourself? Check your math in comparison to our handy investment calculator here.
When to Use the Rule of 72
You should use the rule of 72 at parties, family events, gatherings or anywhere you want to make a good impression or feel really smart. You shouldn’t bust it out in a room full of investors and make definitive statements (you know they carry their calculators with them at all times).
But in all seriousness, the rule of 72 is a good thing to keep up your sleeve if you’re just trying to do quick math for your investments. It’s not something you’ll need if you’re not currently investing or if you’d rather leave this kind of thing to your investing pro.
Want someone on your home team who’s willing to do the compounding interest formulas for you? We don’t blame you. With SmartVestor Pro, you’ll get matched with an investment professional in your area. Don’t worry, they’ll have the Ramsey seal of approval, so you know they’re good people. Sign up here.