What Is the Rule of 72?

Quick Answer

The rule of 72 is a formula that uses your expected rate of return to calculate the number of years it will take for an investment to double in value. While it isn’t an exact science, it can help you get an idea of your financial future.

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It's never a guarantee that your investments will perform as expected, but a simple formula might give you an idea of how long it will take them to double in value. It's called the rule of 72.

The rule of 72 calculation plugs in your expected rate of return to figure out the number of years it will take to grow your investment two-fold. It isn't an exact science, but understanding how it works could help you get a ballpark for your financial future. Crunching the numbers is pretty straightforward. Here's how you can put the rule of 72 to use.

What Is the Rule of 72?

The rule of 72 was introduced by Italian mathematician Luca Pacioli in 1494. The modern-day rule has you divide 72 by your expected rate of return. The result represents the number of years it will take for your investment to be worth twice its current value.

Market volatility is real, so the calculation isn't perfect. Ever-changing economic conditions mean that markets are constantly in flux. It's an important detail since the rule of 72 is based on your expected rate of return. That said, historical data could provide a baseline.

The stock market has produced an average annual return of about 10% since the 1920s. If you divide 72 by 10, it shows that your investment would take approximately 7.2 years to double at this rate of return.

The rule of 72 formula is thought to be most accurate when used with an 8% return rate. Some financial experts recommend adjusting the rule of 72 up or down for every three percentage points you veer in either direction. For example:

  • 5% to 7% rate of return: Rule of 71
  • 8% rate of return: Rule of 72
  • 9% to 11% rate of return: Rule of 73
  • 12% to 14% rate of return: Rule of 74

How to Use the Rule of 72

Let's assume you have $50,000 invested in your 401(k). Based on your asset allocation and past market performance, you're expecting an 8% rate of return. That means it will likely take around nine years for your investment to reach $100,000 (72 ÷ 8 = 9).

Bonds are a good example of when you might adjust the rule of 72. Long-term U.S. government bonds with a maturity period of at least 10 years yielded an overall return of 5.64% (adjusted for inflation) from 1980 to 2019, according to data from investment research firm Morningstar. If you're wondering how long it will take your bond investment to double, you're better off using the rule of 71. In this scenario, you can expect it to take a little over 12 and a half years to double your investment (71 ÷ 5.64 = 12.6).

This handy calculation also applies to inflation. You can use it to estimate how many years it will take for your cash reserves to lose half its value.

Let's say you have $60,000 in your savings account. Consumer prices are 9.1% higher in June 2022 than they were a year ago, according to the U.S. Bureau of Labor Statistics. (The Federal Reserve's target rate of inflation is 2%.) Time will tell if that will cool down, but for our example, let's assume an inflation rate of 5%. Dividing 72 by 5 shows us that your money is expected to lose half its value in about 14 years. At that point, that $60,000 would be worth $30,000.

Rule of 72 Variations

When investing, interest is added to the principal amount you invested—a phenomenon known as compound interest. It means you're basically earning interest on interest. This is the main draw of investing and what fuels long-term growth—and it's also an important part of saving for retirement.

Some say the rule of 69.3 is actually a better guideline than the rule of 72 here because it's more aligned with the formula used to calculate compound interest. This might be a more exact way to gauge your money's growth over time, but the math isn't as quick and simple.

Let's take the example we mentioned earlier: $50,000 invested in your 401(k) with an expected 8% return. Dividing 69.3 by 8 gives us 8.7. According to this formula, your money will double in value a few months earlier than our original estimate.

The Bottom Line

Think of the rule of 72 as a guideline for estimating when your investment could double in value. Don't forget that there are variations to the rule that could provide more accurate guesses. You can also use the rule of 72 to predict how many years it will take for your cash savings to lose half its purchasing power if high inflation continues to be a factor.

The rule of 72 isn't set in stone, but there are other parts of your financial health that are more concrete. Your credit, for example, plays a very real role in your ability to access financing. It's based on precise formulas and uses the information on your credit report to generate this important three-digit number. You can access your free credit score and credit report at any time with Experian to find out where you stand.

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