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

Purchasing Power

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.

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