Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more. Her expertise is in personal finance and investing, and real estate. Now that you’ve got a handle on how the rule of 72 works, let’s run some numbers with different types of investments. Consider working with a financial advisor to develop a plan to meet your long-term financial goals. The rule of 72 suggests that your mutual fund investment would double to $100,000 in 12 years.
The Rule of 72 Is an Easy Way to Assess Your Investments. Are You Using It?
The result is the number of years, approximately, it’ll take for your money to double. The ETFs comprising the portfolios charge fees and expenses that will reduce a client’s return. Investors should consider the investment objectives, risks, charges and expenses of the funds carefully before investing. Investment policies, management fees and other information can be found in the individual ETF’s prospectus.
How to Use the Rule of 72
Hence, adding 1 (for the 3 points higher than 8%) to 72 leads to using the rule of 73 for higher precision. Custom Portfolios are non-discretionary investment advisory accounts, managed by the customer. Custom Portfolios are not available as a stand alone account and clients must have an Acorns Invest account.
How the Rule of 72 Came About
- The formula relies on a single average rate over the life of the investment.
- 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.
- Just like with investment growth, divide 72 by the inflation rate (again, as a percentage) to estimate how many years it’ll take for your money’s buying power to get cut in half.
You divide 72 by the annual rate of return you expect to earn on that investment. For example, if you expect an annual return of 8%, it would take approximately 9 years for your investment to double (72 divided by 8 equals 9). Investors, business owners and financial planners can use the rule of 72 to project return on investment (ROI) for different strategies. The rule can also be used to estimate the impact of inflation on investments. It can also tell you the annual rate of return offered by an investment given how many years it will take to double in value.
Periodic compounding
Since daily compounding is close enough to continuous compounding, for most purposes 69, 69.3 or 70 are better than 72 for daily compounding. For lower annual rates than those above, 69.3 would also be more accurate than 72.[3] For higher annual rates, 78 is more accurate. The Rule of 72 is reasonably accurate for low rates of return. The chart below compares the numbers given by the Rule of 72 and the actual number of years it takes an investment to double. You take the number 72 and divide it by the investment’s projected annual return.
Continuous compounding
Instead of needing to double your capacity in 36 years, you only have 24. Twelve years were shaved off your schedule with one percentage point. Every investor needs dependable estimates on how much their investments will grow in the future. Professionals take advantage of complicated models to answer this question, but the rule of 72 is a tool that anyone can use. You can also use the Rule of 72 to make choices about risk versus reward.
Well for one, it wouldn’t roll off the tongue nearly as well. In actuality, though, utilizing the latter dividend has proven to offer better projections for those who take advantage of continuous compounding. This likely won’t add very much in terms of interest potential for an investment account. When it comes to the accuracy of this rule, the best results are found at an 8% annual interest rate.
Article contributors are not affiliated with Acorns Advisers, LLC. Acorns is not engaged in rendering tax, legal or accounting advice. Please consult a qualified professional for this type of service. The Rule of 72 is a straightforward formula that provides a quick-and-dirty approximation of the time it takes for an investment to double in value assuming a fixed annual rate of return. It’s a solid tool for estimating the effects of compound interest and can be used to gauge the potential growth of your investments over time. The rule of 72 can help you get a rough estimate of how long it will take you to double your money at a fixed annual interest rate.
If you have an average rate of return and a current balance, you can project how long your investments will take to double. This is an incredibly useful tool for both retirement planning and long-term financial planning in general. Although you’ll also want to use a more in-depth projection method at some point, the rule of 72 can serve as a great starting point. Stocks do not have a fixed rate of return, so you cannot use the Rule of 72 to determine how long it will take to double your money.
SmartAsset Advisors, LLC (“SmartAsset”), a wholly owned subsidiary of Financial Insight Technology, is registered with the U.S. This is most often found attached to savings accounts, money market accounts (MMAs) and certificates of deposit (CDs). All three of these account types are generally for long-term usage, so check to see if your bank includes them. 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 it would take to do so can help you infer when you would reach your goal portfolio size. For daily or continuous compounding, using 69.3 in the numerator gives a more accurate result.
However, you still can use it to estimate what kind of average annual return you would need to double your money in a fixed amount of time. Instead of dividing 72 by the rate of return, divide by the number of years you hope it takes to double your money. In practical use, the Rule of 72 is valuable for a variety of financial scenarios. Investors can utilize it to estimate the growth of stocks, bonds, or savings accounts, allowing for better long-term financial planning. It also serves as a tool for understanding the impact of inflation on purchasing power, indicating how long it will take for money to lose half its value due to rising prices.
So far year-to-date, as of mid-May, the S&P 500 has had a return of 11.56%. The Rule of 72 would suggest your investments would double at that rate in 6.2 years — but that’s assuming that rate of return stays constant. Most financial metrics are a little too complex to be done in your head.
High-risk investments could swing either way, rendering significant gains or big losses. The idea is to include a mix of investments in your portfolio, from riskier assets to safer bets. Investing in a wide variety of sectors and industries from different geographic locations can also help mitigate risk. Investors can use the Rule of 72 to see how many years it will take to cut in half their purchasing power due to inflation. You can divide 72 by the rate of inflation to get 24 years until the purchasing power of your money is reduced by 50 percent. High inflation, like the 8 percent rate we saw in 2022, drops the time to half to nine years though.
That’s because it can potentially put compound returns to work for you. Learning how to calculate compound interest is a complex mathematical procedure that leaves most people reaching for a calculator. To get started, figure out what your fixed compound annual interest rate is. Once you know this, you must divide it into 72 (hence the rule of 72). The quotient is the number of years it will take for your invested money to double in value.
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). This is because, as above, the rule of 72 is only an approximation that is accurate for interest rates from 6% to 10%. The Rule of 72 is more accurate if it is adjusted to more closely resemble the compound interest formula—which effectively transforms the Rule of 72 into the Rule of 69.3.
One variation is to adjust the rule up or down for every 3 points the ROI drifts from 8%. If all goes well, your investment will increase in value — and you’ll ultimately turn a profit after covering your tax liability. How long that will take depends on the asset in question, market volatility, and other factors. But that doesn’t mean investors can’t estimate certain outcomes. Some use the rule of 72 to predict when an investment’s value will double.
