For example, if an investor – i.e. a limited partner (LP) of the fund — decided to contribute $200,000 to an active investor’s fund. The 4% retirement rule is simple but no guarantee of comfort in your old age. Good research can help investors find the best companies to invest in. Access and download collection of free Templates to help power your productivity and performance.

In the beginning, investing (like parenting) was very confusing. Level up your career with the world’s most recognized private equity investing program. The Rule of 72 applies to cases of compound interest, but not to simple interest.

## Using the rule to estimate compounding periods

Yes, the Rule of 72 allows you to estimate the amount of time it will take to double by dividing by the rate of return. The formula for the Rule of 72 divides the number 72 by the annualized rate of return (i.e. the interest rate). The Rule of 72 is well-known in finance and is perceived by most as a general rule of thumb to estimate the number of years that it would take an investment to double in value. The Rule of 72 is a shorthand method to estimate the number of years required for an investment to double in value (2x).

The Rule of 72 can be used for any asset that grows at a compounded rate. Compounding returns is a powerful force when it comes to saving and investing, since interest is calculated both on the initial principal plus accumulated interest from previous periods. The Rule of 72 is a simple way to determine how long an investment will take to double given a fixed annual rate of interest. Dividing 72 by the annual rate of return gives investors a rough estimate of how many years it will take for the initial investment to duplicate itself. Advisory services are provided for a fee by Empower Advisory Group, LLC (“EAG”).

## Using the Rule of 72 to guide investment decisions

If you want to know how long it will take you to double your investment at a specific fixed interest rate, the rule of 72 is the fastest way to do so. But even if you’re not looking to multiply your money twofold, knowing the period of time it would take to do so can help you infer when you would reach your goal portfolio size. If we assume the 9% annual return is in fact achieved, the estimated number of years for the original investment to double in value is roughly 8 years. By merely taking the number 72 and dividing it by the rate of return (or interest rate) expected to be earned, the output is the approximate number of years for an investment to double. Let’s say that you start with the time frame in mind, hoping an investment will double in value over the next 10 years. This says the investment will need to go up 7.2% annually to double in 10 years.

- Similarly, to determine the time it takes for the value of money to halve at a given rate, divide the rule quantity by that rate.
- Keep in mind it is only a mathematical formula that helps determine how long it hypothetically takes for your money to double.
- It’s worth noting, the “rule of 72” definition isn’t necessarily perfectly accurate because past market results do not predict future market behavior.
- Once you know this, you must divide it into 72 (hence the rule of 72).
- The rule of 72 primarily works with interest rates or rates of return that fall in the range of 6% and 10%.
- No part of this blog, nor the links contained therein is a solicitation or offer to sell securities.

The natural logarithm is the amount of time needed to reach a certain level of growth with continuous compounding. Notice that although it gives an estimate, the Rule of 72 is less precise as rates of return increase. Hence, adding 1 (for the 3 points higher than 8%) to 72 leads to using the rule of 73 for higher precision. The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. No part of this blog, nor the links contained therein is a solicitation or offer to sell securities.

## Continuous compounding

The chart below compares the numbers given by the Rule of 72 and the actual number of years it takes an investment to double. Certain sections of this blog may contain forward-looking statements that are based on our reasonable expectations, estimates, projections and assumptions. Past performance is not a guarantee of future return, nor is it indicative of future performance.

In the above scenario, every $1,000 you invest today represents around $16,000 by retirement, based on historical averages. This knowledge might cause you to reevaluate your current financial priorities. To further underscore the importance of compound returns, consider Warren Buffett. As you can see from the table above, the rule of 69.3 yields more accurate results at lower interest rates.

## How to Calculate the Rule of 72?

Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts. However, the effective interest rate used in the equation is not in percentage form. On that note, using Excel (or a financial calculator) is recommended for a more precise figure, especially in higher stake circumstances. Get stock recommendations, portfolio guidance, and more from The Motley Fool’s premium services. Here’s how to invest in Palantir Technologies, a software company focused on data security and AI solutions for maximizing data.

## How to Calculate the Rule of 72

Consider working with a financial advisor to develop a plan to meet your long-term financial goals. You can also apply the Rule of 72 to debt for a sobering look at the impact of carrying a credit card balance. Assume a credit card balance of $10,000 at an interest rate of 17%. If you don’t pay down the balance, the debt will double to $20,000 in approximately 4 years and 3 months. In addition to being a useful estimation tool that can help formulate investment objectives, the Rule of 72 is also a helpful method for comparing investments. For higher rates, a larger numerator would be better (e.g., for 20%, using 76 to get 3.8 years would be only about 0.002 off, where using 72 to get 3.6 would be about 0.2 off).

## Examples of How the Rule of 72 Formula Works

Professionals take advantage of complicated models to answer this question, but the rule of 72 is a tool that anyone can use. Replacing the “R” in R/200 on the third line with 7.79 gives 72 on the numerator. This shows that the rule of 72 is most accurate for periodically compounded interests around 8%. Similarly, replacing the “R” in R/200 on the third line with 2.02 gives 70 on the numerator, showing the rule of 70 is most accurate for periodically compounded interests around 2%. An early reference to the rule is in the Summa de arithmetica (Venice, 1494. Fol. 181, n. 44) of Luca Pacioli (1445–1514).