Ever wonder how long it will take your investment to double? Perhaps you’ve heard financial experts talk about invested wealth growing astronomically over time, seemingly by magic. Where do these assumptions come from?
Whether you’re saving for an emergency fund, a down payment, or early retirement, sometimes it helps to know the doubling time for your current or initial investment if you were to stop investing new money toward it.
You can run through the (rather more complex) calculation for the Time Value of Money. Or you can use a quick shorthand: the rule of 72.
What Is the Rule of 72?
The rule of 72 offers an easy way to calculate the number of years it will take your money to double, based on the annual rate of return it earns and compounding growth.
While not perfectly precise, as a rule of thumb it’s accurate enough for most purposes. After all, the annual return you expect to earn on your money probably won’t exactly match your real returns. But for returns in the common range of 6% to 12%, the rule of 72 delivers surprisingly accurate results.
Here’s a breakdown of the rule of 72’s accuracy in predicting how long it takes an investment to double, depending on the rate of return:
|Rate of Return||Years to Double Estimated by Rule of 72||Exact Years to Double||Difference (in Years)|
As you can see, the rough estimate the rule of 72 gives you is most accurate for returns between 5% to 25%, but stays accurate enough for most purposes at any return between 1% and 100%.
The Rule of 72 Formula
To estimate how long it will take your money to double, simply divide 72 by the annual return rate you expect to earn.
The formula therefore reads:
Years to double = 72 ÷ return on investment (annual %)
It’s the kind of calculation you can do on the back of a cocktail napkin. Even after drinking one or two of said cocktails.
Example of the Rule of 72
You divide 72 by 10 to conclude it will take around 7.2 years for your investment to double in value. Not exactly rocket science, is it?
Note that you don’t divide the return rate by 100 in the rule of 72 calculation. You don’t enter it as a decimal, such as 0.10, or type it as 10% in an Excel spreadsheet. Instead, you simply enter the number as it reads on the page. For a 10% rate of return, you simply divide by 10.
If you expect to earn a 5% return rather than 10%, you can expect it to take twice as long for your money to double in value: 14.4 years (72 ÷ 5 = 14.4). And so it goes for other return rates as well.
How to Use the Rule of 72
We all have long-term financial goals, from saving a down payment to buy a house to saving for retirement. Regardless of your goal, it helps to know how much help you can expect from compound interest on your investments.
And toward that end, you’ll want to know how quickly your existing investments will double in value.
For example, imagine you’re 55 and thinking about leaving your high-stress job for a more relaxed one that doesn’t pay as well. You want to know if you can stop contributing to your Roth IRA, and simply let your existing investments keep growing on their own.
Say you have around half the nest egg you need to retire. So you run a quick calculation in your head using the rule of 72: at an average return of 7.2%, you can expect it to take another 10 years (72 ÷ 7.2 = 10) for your Roth IRA balance to double. In other words, if you’re halfway there at age 55, you should hit your target balance by age 65 and reach financial independence without having to make new contributions.
Or say you want to know if you can stop contributing to your child’s 529 plan. You expect to earn around 9% on your investments, so you calculate that it would take eight years for your current balance to double (72 ÷ 9 = 8). If your child is currently 10 years old, then by the time they’re 18 you can expect to have roughly double today’s balance if you don’t contribute any more.
Sure, the real world is messier than calculations on a page. But the rule of 72 offers a simple way to estimate how quickly your investments will double if you stop adding fresh funds to them.
Forecasting Loss of Spending Power from Inflation
You can also use the rule of 72 to calculate the period of time it will take for inflation to cut your savings’ value in half.
The math works the same way. If you expect a long-term average inflation rate of 2%, it would take around 36 years for the value of the dollar to cut in half. It serves as a reminder not to leave your money uninvested and collecting dust as savings.
Keep that loss in value in mind also as you calculate your future returns. If you earn an 8% return, but inflation runs at 2%, your real return is only 6%.
Alternatives to the Rule of 72
The rule of 72 is a handy and simple tool for estimating the growth of any given investment, but it’s not the only way to project how your money will grow. Here are some common alternatives that provide a bit more precision if you’re willing to do some math.
Time Value of Money
You could, of course, calculate the exact amount of time it would take for an investment to double using Time Value of Money calculation. That formula looks like this:
FV = PV*(1+r)t
FV represents the future value, PV represents the present value, r is the return and t is the time period. So you’d have to jump through a series of mathematical hoops to reverse the formula and calculate t. Which sounds like a lot of unnecessary work, even to a personal finance nerd like me.
Rule of 69.3
While the rule of 72 works well for annual compounding, a lower numerator works better for daily or continuous compounding. In cases where you expect your investment to compound daily or continuously, divide into 69.3 instead of 72. That’s not exactly mental math anymore, but it’s a simple operation using a calculator.
Compound Interest Calculator
The rule of 72 estimates how long it takes your principal investment to double without adding any new money. In most cases, though, you don’t want to stop funneling new money into your investments. So rather than using the rule of 72, you should use a compound interest calculator to take into account regular new contributions to your portfolio.
The rule of 72 isn’t perfectly accurate, but in most cases you don’t need it to be. In all likelihood, your estimate of your future returns will fall further off the mark than the inaccuracy of the rule of 72 calculation. If you estimate you’ll earn 10% per year and you actually earn 8% or 12%, that will change the length of time it takes for your money to double more than the “rounding error” inherent in using the rule of 72.
I particularly like the rule of 72 for calculating the worst-case scenario of coasting on your current investments, should you lose the ability to add more money each month.
In the FIRE movement, for example, people refer to “coast FI” — having enough money saved for retirement that it can compound on its own between now and retirement without having to contribute another cent. Coast FI allows you to take your dream job that doesn’t pay as well without losing sleep over your retirement.