The Rule of 72: A Quick Mental Math Trick for Compound Growth

Compound interest formulas are notoriously complex. If you want to know exactly how long it will take for an investment to double at a specific interest rate, you usually need a scientific calculator and a grasp of logarithms. Fortunately, the financial world has a remarkably accurate shortcut known as the Rule of 72.

What is the Rule of 72?

The Rule of 72 is a simple mental math formula used to estimate the number of years required to double your money at a given annual rate of return.

The formula is incredibly simple: Divide the number 72 by your annual interest rate. The result is the number of years it will take for your money to double.

Real-World Investment Examples

• The Conservative Bond: You invest $10,000 in a bond yielding a guaranteed 4% a year. How long until you have $20,000? Divide 72 by 4. The answer is exactly 18 years.
• The Stock Market: You invest $10,000 in an S&P 500 index fund, which historically returns roughly 8% annually after inflation. Divide 72 by 8. Your money will double to $20,000 in just 9 years. In another 9 years (18 years total), it will double again to $40,000!
• The Risky Bet: You find an aggressive asset returning 12% a year. 72 divided by 12 equals 6 years to double.

The Dark Side of the Rule of 72 (Debt)

Compound interest is a double-edged sword. Just as the Rule of 72 can show you how fast your wealth will grow, it can also reveal how incredibly fast your debt will spiral out of control if left unchecked.

Imagine you have a $5,000 balance on a credit card charging a predatory 24% APR. If you ignore that debt and the interest compounds, how long until you owe the bank $10,000?

Divide 72 by 24. The answer is 3 years. In just 36 months, your debt will literally double.

Why Inflation Matters

You can also use the Rule of 72 to calculate the devastating effects of inflation on your purchasing power. If inflation runs at an average of 3% a year, divide 72 by 3. In 24 years, the cost of living will double. This means if you leave your emergency fund buried in the backyard in a coffee can, it will lose half of its purchasing power in two decades.