The Rule of 72 is a quick and easy way to figure out how long it will take for an investment to double in value. It's not a precise rule of thumb, but it will get you close to the answer, and the math can be done by most people in their heads.
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The Rule of 72
What Is the Rule of 72?
Investors can approach the Rule of 72 in one of two ways. You can start with either your target time period or your expected rate of return.
Let's say that you start with the time frame in mind, hoping an investment will double in value over the next 10 years. Applying the Rule of 72, you simply divide 72 by 10. This says the investment will need to go up 7.2% annually to double in 10 years.
You could also start with your expected rate of return in mind. Perhaps you expect a stock to go up in value by 15% annually. Dividing 72 by 15 gives us 4.8 -- this is how many years it will take for the stock to double, according to the Rule of 72.
Why it matters
Why the Rule of 72 matters
The Rule of 72 isn't intrinsically important, but the concept of compound interest, or compound returns, is. Albert Einstein reputedly called it "the most powerful force in the universe." The Rule of 72 is simply a mental shortcut that helps investors easily understand and apply this powerful force.
To further underscore the importance of compound returns, consider Warren Buffett. When he was around 30 years old, he became a millionaire. And when he was 56 years old, he became a billionaire.
In other words, it took Buffett about 26 years to accrue 99% of his first $1 billion. But thanks to compounding returns, his net worth soared to around $44 billion over the subsequent 26 years. As of this writing, his net worth is $121 billion, according to Bloomberg, just 11 years after being worth $44 billion.
As author Morgan Housel writes in his book The Psychology of Money: "[Buffett's] skill is investing, but his secret is time. That's how compounding works."
How it can help
How the Rule of 72 can help prioritize financial decisions
The Rule of 72 facilitates understanding regarding compound returns. And this knowledge allows you to take appropriate action in your personal financial journey.
For example, consider that the stock market goes up about 10% annually on average. Let's say that you invest your retirement money solely in an index fund for the S&P 500 and plan to retire 30 years from now. Using the Rule of 72, you would see that your investments should double roughly every 7.2 years (72 divided by 10). This allows the investments that you make this year to double four times before retirement (30 divided by 7.2).
In the above scenario, every $1,000 you invest today represents around $16,000 by retirement, based on historical averages. This knowledge might cause you to reevaluate your current financial priorities.
A proper understanding of how returns compound over time can also keep investors from taking on unnecessary risk. Anyone would love to earn 50%, 75%, or 100% in compound annual returns. But any strategy that promises returns like these is likely too good to be true. And investors simply don't need returns this high to achieve their financial goals when time is on their side.
Simply put, even modest annual gains can add up to surprising sums when given enough time. And the Rule of 72 helps investors quickly grasp the concept.
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Example
Using the Rule of 72 to guide investment decisions
I'll use Domino's Pizza (DPZ -0.38%) stock as an example of how to use the Rule of 72 to guide investment decisions. In the first half of 2023, the company grew its net income by about 10% from the comparable period of 2022. Over the last few years, management has repurchased about 2% to 3% of outstanding shares annually. And it pays a dividend that has about a 1% yield.
For the sake of simplicity, let's assume that Domino's can keep these trends going. Under these assumptions, investors can expect around a 14% total shareholder return annually (earnings growth + share repurchases + dividends).
The Rule of 72 says it will take a little more than five years for an investment in Domino's to double in value (72 divided by 14). This is far better than average stock market returns. On the surface, 14% annual returns might sound pedestrian. But the Rule of 72 shows that these returns are actually quite good over a long period of time. And it could motivate an investor to buy Domino's stock.
Of course, this is just for illustrative purposes. More would go into building an investment thesis for Domino's Pizza. But using the Rule of 72 in quick exercises like this can help filter out lower-quality ideas, leaving full attention for further digging into more promising ideas like Domino's when deciding whether or not it's actually a stock you want to add to your investment portfolio.
Jon Quast has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Domino's Pizza. The Motley Fool has a disclosure policy.
FAQs
Let's say that you start with the time frame in mind, hoping an investment will double in value over the next 10 years. Applying the Rule of 72, you simply divide 72 by 10. This says the investment will need to go up 7.2% annually to double in 10 years. You could also start with your expected rate of return in mind.
What is the Rule of 72 in simple terms? ›
It's an easy way to calculate just how long it's going to take for your money to double. Just take the number 72 and divide it by the interest rate you hope to earn. That number gives you the approximate number of years it will take for your investment to double.
What is the Rule of 72 Warren Buffett? ›
Here's how it works: To understand the Rule of 72, divide 72 by the expected annual rate of return. For example, if you invest Rs 1 lakh in an investment with an expected 8% annual return, divide 72 by 8 to get 9. This means it will likely take about nine years for your money to double, growing to Rs 2 lakh.
Does the Rule of 72 really work? ›
The Rule of 72 is an estimate, and more accurate at around 8 percent interest. The further the interest rate or inflation rate is from 8 percent, the less precise the result will be.
What is the math behind the Rule of 72? ›
Using the rule to estimate compounding periods
For instance, if you were to invest $100 with compounding interest at a rate of 9% per annum, the rule of 72 gives 72/9 = 8 years required for the investment to be worth $200; an exact calculation gives ln(2)/ln(1+0.09) = 8.0432 years.
How long will it take to increase a $2200 investment to $10,000 if the interest rate is 6.5 percent? ›
Final answer:
It will take approximately 15.27 years to increase the $2,200 investment to $10,000 at an annual interest rate of 6.5%.
How to double $2000 dollars in 24 hours? ›
The Best Ways To Double Money In 24 Hours
- Flip Stuff For Profit. ...
- Start A Retail Arbitrage Business. ...
- Invest In Real Estate. ...
- Play Games For Money. ...
- Invest In Dividend Stocks & ETFs. ...
- Use Crypto Interest Accounts. ...
- Start A Side Hustle. ...
- Invest In Your 401(k)
The Rule of 72 is not precise, but is a quick way to get a useful ballpark figure. For investments without a fixed rate of return, you can instead divide 72 by the number of years you hope it will take to double your money. This will give you an estimate of the annual rate of return you'll need to achieve that goal.
What is the first rule of investing is don't lose money? ›
Warren Buffett was famous for saying, “The first rule of investing is, don't lose money. The second rule of investing is, don't forget rule number one.” Baby Boomers, who will retire soon if they haven't already, would be wise to heed this sage advice.
What is the 7% sell rule? ›
The "7-8% loss rule" is a risk management strategy commonly used in stock trading and investing. This rule suggests that an investor should sell a stock if its price falls 7-8% below the purchase price. The main idea behind this rule is to limit potential losses and protect capital.
With $1 million invested, it may be possible to live off the interest from that portfolio. However, before deciding to do that, consider consulting with a financial planner who can help you develop the optimal plan for retirement income.
How can I double my money in 5 years? ›
There is only one way in which you can double your money in 5 years and that is through mutual funds. Despite the market risks, mutual funds can earn significant returns in 5 to 6 years. This is because mutual funds offer higher returns than any other investment option and higher risk.
What are the flaws of Rule of 72? ›
Rule 72 Limitations
Here are some main disadvantages to calculating your income using this formula: The formula uses a fixed percentage. As you understand, a fixed percentage can only be obtained on a deposit; in investments, the percentage varies depending on the market situation. It works only with annual payments.
What 2 things does the Rule of 72 solve for you? ›
The Rule of 72 is a quick, useful formula that is popularly used to estimate the number of years required to double the invested money at a given annual rate of return. Alternatively, it can compute the annual rate of compounded return from an investment, given how many years it will take to double the investment.
Is your money safer in a regular savings or in an investment? ›
Savings account balances have no risk of declining. Plus, FDIC insurance protects your money in the unlikely event that your bank or credit union goes under. Higher risk. When investing, you could lose money, break even, or earn a return—there are no guarantees.
What is the Rule of 72 for dummies? ›
You divide 72 by your expected annual rate of return. This calculation will help you arrive at the approximate number of years it'll take for your investment to double. Consider this example: 5% Rate of Return: If you're anticipating an average return of 5% on an investment, you'd divide this return into 72.
What 2 things does the rule of 72 solve for you? ›
The Rule of 72 is a quick, useful formula that is popularly used to estimate the number of years required to double the invested money at a given annual rate of return. Alternatively, it can compute the annual rate of compounded return from an investment, given how many years it will take to double the investment.
How long does it take to double your money at 7 percent? ›
Why it Pays to Know the Math
| Rate of Return | Rule of 72 # of Years to Double Money | Logarithmic Formula # of Years to Double Money |
|---|
| 5% | 14.4 | 14.2 |
| 6% | 12.0 | 11.9 |
| 7% | 10.3 | 10.2 |
| 8% | 9.0 | 9.0 |
15 more rowsSep 14, 2023
It would take 14.4 years to double your money. Applying the rule of 72, the number of years to double your money is 72 divided by the annual interest rate in percentage. In this question, the annual percentage rate is 5%, thus the number of years to double your money is: 72 / 5 = 14.4.
