The Rule of 72

As interest compounds, things get bigger. Often it’s useful to know how long it will be until the original principal has doubled. Using what we’ve learned it’s possible to derive a formula to calculate the time period, but there is a very easy to remember rule of thumb approximation and it’s called The Rule of 72

It goes like this. Let’s say you have an investment with an annual interest rate of 6%. How long would it take for your initial investment to double in value? To estimate this, simply divide 72 by 6. The answer = 12. So, with an interest rate of 6%, it will take approx. a dozen years to double your initial investment.

At 4% interest, it would take 72/4 = 18 years to double (approx). The rule also works the other way around: What interest rate would you need to receive to double your investment in 5 years? Answer, approx. 14.4%