To calculate an investment’s doubling time at a return rate of 8%, simply divide 72 by 8. In other words, your invested dollars will double within nine years.
This is a quick and straightforward way of using mental mathematics to quickly estimate the amount of time required for an amount of money to double, such as by calculating how quickly the amount of money invested will multiply over time.
By calculating the two investment options — one (A) averaging six percent, and the other (B) averaging nine percent, you can quickly determine which investment will double more quickly without needing to compare any other figures.
Say you have 72 ÷ 6 = 12 & 72 ÷9 = 8. The four years may not sound huge but over decades it adds up.
The Rule of 72 applies to all types of investment as well as anything that grows at a constant percent.
Loan interest? Same thing. If your debt is on a 12% growth rate per year and you don’t make a payment, 72 ÷ 12 = 6 years. Therefore, your balance could double in roughly 6 years without making a payment. Not great!
If your YouTube views grow 24% per month, 72 ÷ 24 = 3 months.
If incidences of a virus grow at 10% per day, 72 ÷ 10 = about 7.2 days.
The Rule of 72 works on anything that grows at a percentage basis.
However, before you use this rule for life-altering decisions in under five seconds, there are two caveats to emphasize.
First, the rule is a rough estimate. If you need a precise answer (like on retirement withdrawl calculations down to the penny), then you must calculate with a full compounded interest method. The Rule of 72 gets you close, but not exact.
The second limitation to this rule is that it will work best when the interest rate is in the 1% – 12% range; it’s actually pretty accurate within that range. Outside of that range, it’s not as dependable; you may hear about some minor variations to this rule, like the Rule of 69.3 or the Rule of 78, but they really reflect the same principle: to estimate the amount of time it will take to double your money, divide a constant by the growth rate.
For example, if I’m investing at a 12% annual rate of return, how long will it take for my investment to double?
72 ÷ 12 = 6 years.
See how easy that was?
That’s why you don’t need to pull out your calculator every time you want to gain perspective. Financial literacy is not about memorizing formulas; it’s also about having tools you can actually take advantage of in day-to-day life and during interactions with others and while making decisions.
Interestingly, the majority of people don’t use doubling time to measure the value of an investment; instead, most always look only at the percentage. “8 sounds good”; “12 sounds great.” But when you use only the percentage to evaluate an investment, the percentage alone does not generally provide an adequate amount of emotional engagement.
Being aware of the fact that your money can potentially double in nine years instead of twelve years will influence your patience level; it will influence the type of risks you take; and it will ultimately affect the way you view your long-term goals.
So, here’s the real nugget to take away from this — and yes, I’m going to land this airplane at the beginning again:
If you know what it takes for your money to double, you’ll know what growth is and therefore, make better choices.
Simply divide 72 by a number; there is no advanced mathematical formula.
Next time you hear someone mention an interest rate, determine how long it will take for your money to double; this is a great way to use this brain-shortcut!
