I’m not a huge fan of math. The best inventions for me when it comes to math have been calculators and Microsoft Excel. Even with these great tools to help me, there is a simple math formula that will answer many of my personal finance questions that doesn’t require these tools. It’s the Rule of 72.
Rule Of 72
The Rule of 72 is a shortcut in determining the effects of compound interest. The formula is as follows:
Years to Double = 72/Interest Rate
That’s it! In a nutshell, it will tell you how long it will take for your money to compound enough so that it doubles.
This formula is a great tool to get a quick answer to your personal finance problems. For example, let’s say that I have $1 million saved for retirement. I know that I need $2 million in order to quit my job today and still live comfortably in retirement. How long will it take for my investment to double if I am earning 5% per year? The answer is a little over 14 years.
Let’s look at a few more examples.
- You are earning 6% interest. How long until your $10,000 doubles in value? 72 divided by 6 is 12. So it will take 12 years for your money to double in value at 6%.
- Let us say that you want to double your money in 10 years. What interest rate do you need to earn on your money? Simply take 72 divided by 10 and you get 7.2%. This means you need to earn 7.2% in order to double your money in 10 years.
You can even use the Rule of 72 in reverse as well, to see the effects inflation will have on your money. If you know that inflation is 3%, you can expect the price of goods to double in price in 24 years (72/3 equals 24).
For those big thinkers out there, there are two other formulas like the Rule of 72. The first is the Rule of 115. This will tell you how long it will take your money to triple in value at a given interest rate. And for all of you dreamers out there, the Rule of 144 tells you how long it will take for your money to quadruple.
Understand that this calculation won’t be exact as taxes and other factors are not being taken into account. But if you want a quick calculation to get idea of when you can expect your money to double or what interest rate you need to earn to meet a savings goal, the Rule of 72 is a great tool in your arsenal. If you want to play around with other personal finance formulas but hate, math, check out my financial calculators.
Hi, my name is Jon and I run Compounding Pennies. I’ve been interested in personal finance since high school and love writing and talking about it. You can learn more about me in the Authors section of this site.