Since the 1400s, books on investing have described the Rule of 72. Since we humans only starting publishing in earnest in the 1400s, this rule might be even older. Knowing the rule and putting it to work for you is critical to making the most of your investments.
Laying Down the Rule of 72
The Rule of 72 tells you how long compound interest needs to double your money. The rule states:
Divide 72 by the interest rate you earn to learn the approximate number of years needed to double your money through compound interest.
Show Me an Example
If your retirement savings earn 7 percent a year, then you’ll need a little more than ten years to double your money.
See for yourself. Using a calculator, or the calculator on a smartphone, divide 72 by 10 and you’ll get the answer 10.3.
In other words, an investment earning seven percent a year will double in value in 10.3 years without you doing anything else.
Need More Proof of the Rule of 72?
To firmly prove the point, let’s do the math the long way. We’ll start with $10,000 and a seven percent interest rate, and see how much money we have at the end of each year.
As you see, each year the amount of interest continues to grow, even though the interest rate remains the same. At the end of ten years of seven percent interest, our money has increased from $10,000 to $19,671.51. Not quite double, but remember the formula said we’d need 10.3 years.
This example covers a simple case of collecting interest just once a year. The math of compounding can get more complicated when interest is paid quarterly, monthly, or even daily. For now, yearly payments serve to prove the point: compound interest can double your money, and the Rule of 72 is a long-standing and useful tool for understanding how much time is needed to double your money.
If you want to see how the Rule of 72 fits into your retirement plans, download the free R Minus 10 retirement calculator.