The Rule of 72: Learn How To Double Your Money with Compound Interest

All investments carry a level of risk, including the risk of loss on investment. 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. Simply divide 72 by the fixed annual rate of return and you’ll know how many years it will take for your money to double. Just as you can’t expect the rule of 72 to guarantee when your investment will double in value, you can’t expect to achieve a specific rate of return year after year, Briggs advises. The value of the rule is fairly limited in a practical sense, given the caveats and reasons to be cautious about relying on it as a forecaster of future performance, he adds. The Rule of 72 can be used for any asset that grows at a compounded rate.

  • It’s a shortcut that you, as an investor, can use to estimate if an investment will double your money quickly enough to be worth pursuing.
  • This is most often found attached to savings accounts, money market accounts (MMAs) and certificates of deposit (CDs).
  • Most investment accounts, including retirement accounts, brokerage accounts, index funds, and mutual funds fall into this range of return.

To get a great return on your money, first, you have to learn how to invest. Join me at my next Free Investing Webinar to learn, not only the basics of investing but also know how you can find incredible companies that will give you that 26% annual return. When saving up to put a down payment on a house, the exact number of years it takes to double an investment at a 24% growth rate is 3.2 years. Another use for the rule is to demonstrate, or estimate, the long-term effects of interest on a loan.

How to calculate the Rule of 72

If you started with $10,000, then after three years you would have $20,000. After another three years, you would have $40,000, and after another three years, you would have $80,000. That’s eight times more than what you started with, plus it only took nine years given a 24% annual rate of return. If the investment is compounding continuously rather than compounding annually, the Rule of 69.3 offers a more accurate estimation.

SmartAsset Advisors, LLC (“SmartAsset”), a wholly owned subsidiary of Financial Insight Technology, is registered with the U.S. SmartAsset does not review the ongoing performance of any RIA/IAR, participate in the management of any user’s account by an RIA/IAR or provide advice regarding specific investments. Rules of 69.3 and of 69 are also https://online-accounting.net/ methods of estimating an investment’s doubling time. The rule of 69.3 is considered more accurate than the Rule of 72, but can be much more troublesome to calculate. Therefore, investors typically prefer to use a rule of 69 or 72 rather than the rule of 69.3. The Rule of 72 gives an estimation of the doubling time for an investment.

Adjustments for higher accuracy

For example, if you want to double your money in eight years, divide 72 by eight. This tells you that you need an average annual return of 9% to double your money in that time. For this reason, the Rule of 72 is often taught to beginning investors as it is easy to comprehend and calculate. The https://turbo-tax.org/ Security and Exchange Commission also cites the Rule of 72 in grade-level financial literacy resources. A proper understanding of how returns compound over time can also keep investors from taking on unnecessary risk. Anyone would love to earn 50%, 75%, or 100% in compound annual returns.

Rule of 72 Formula

At really high interest rates, for example, using the number 78 will give more accurate results. On the other hand, 69 or 70 are more accurate for lower interest rates and interest that compounds daily. Daily compounding is rare in investing and mostly happens with savings products such as high-yield savings accounts and certificates of deposit (CDs).

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It should not be used as an emergency fund strategy, as any withdrawals could affect your future financial stability significantly. This method offers account holders a fixed annual payout, with the amount typically falling somewhere between the highest and lowest amount the account owner can withdraw. 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. 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.

The Rule of 72 is a calculation that estimates the number of years it takes to double your money at a specified rate of return. If, for example, your account earns 4 percent, divide 72 by 4 to get the number of years it will take for your money to double. All projections made using this or any financial calculator are hypothetical. We do our best to give our users accurate financial information based on the provided data, but it’s impossible for anyone to predict future market movement.

Albert Einstein reputedly called it “the most powerful force in the universe.” The Rule of 72 is simply a mental shortcut that helps investors easily understand and apply this powerful force. The rule of 72 has been around a long time—in fact, it dates back to the 15th century—and it’s most commonly used in investing. The accounting shortcut has broader applicability, and particularly as inflation and interest rates have hit multi decade high levels in recent years.

What is your risk tolerance?

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. Rule 72(t) allows penalty-free withdrawals from IRA accounts and other tax-advantaged retirement accounts like 401(k) and 403(b) plans. Julia Kagan is a financial/consumer journalist and former senior editor, personal finance, of Investopedia. On the other hand, if you choose to withdraw your dividends rather than reinvest them, your earnings might not compound, and the Rule of 72 wouldn’t work. Although the rule of 72 offers a fantastic level of simplicity, there are a few ways to make it more exact using straightforward math.

To calculate the Rule of 72, all you have to do is divide the number 72 by the rate of return. You can use the formula below to calculate the doubling time in days, months, or years, depending on how the interest rate is expressed. For example, if you input the annualized interest rate, you’ll get the number of years it will take for your investments to double. 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.

But any strategy that promises returns like these is likely too good to be true. And investors simply don’t need returns this high to achieve their financial goals when time is on their side. For investments with rates of return beyond that 5% to 10% range, there are other formulas that can more accurately estimate https://quickbooks-payroll.org/ how long it will take to double the value. There are a variety of other formulas—including the rules of 69, 70, 71, and 73—though the two most viable alternatives are the rule of 71 and the rule of 73. These are slight variations of the rule of 72, just using different numerators for the calculation.

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