 # The Rule of 72

The rule of 72 is used to estimate the number of years it will take to double your money at a given annual rate of return. Using the rule of 72, you can determine this very simply by dividing 72 by the rate of return (expressed as a percentage), such as: ## The Good and Bad of Compounding Returns

You can use the rule of 72 to estimate the positive or negative impact of compounding events, such as.

• How quickly your income will be halved in terms of purchasing power due to inflation
• How fast your investments will double in value, at a given rate of return

## To determine how quickly your income will be halved in terms of purchasing power due to inflation, divide 72 by the current inflation rate. For example:

Inflation rate = 3%

72/3 = 24

If the rate of inflation is 3%, prices will double or purchasing power will be halved in 24 years.

Inflation rate = 2%

72/2 = 36

If the rate of inflation is 2%, prices will double or purchasing power will be halved in 36 years.

### Investment Return

To determine how fast your investments will double in value, at a given rate of return, simply divide 72 by your anticipated rate of return.

Rate of return = 6%

72/6 = 12

If the rate of return is 6%, your initial investment will double in 12 years.

Rate of return = 2%

72/2 = 36

If the rate of return is 2%, it will take 36 years to double your money.

The following graph illustrates the difference in growth between a money market with an annual rate of return of 2% and a balanced portfolio with an average annual return of 6%.

##  # The Rule of 72

Test your understanding of the rule of 72. Drag and drop the number of years it would take to double your investment for each rate of return. Click the button below to begin.