The Rule Of 72

The rule of 72 is a famous formula in the finance world that determines how long will it take for an investment to double, based on rate of return. The formula was first introduced in the Summa de Arithmetica of Luca Pacioli in 1494. The good thing about the rule is that it can be used for inflation rates, GDP growth, Stock market returns, or anything that grows in value over time. Here's the formula in it's glory:

T = 72 / R

T= Number of years required to double an investment.

R = Annual Interest rate (often written as a percentage).

The rule of 72 works by dividing the Interest Rate per Period with the number 72 in- order to calculate the number of years it will take for an investment to double in value.

For Example: If you own an investment with an annual Interest rate of 5%, in- order to get the number of years for the investment to double, you would divide 72 by 5 which is 14.4; In 14.4 years your investment will double in value.

Fun Fact- The rule of 72 is extremely accurate, especially when it's regarding low- interest rates. The only problem with this rule's accuracy is that when interest rates start to get higher, the rules accuracy starts to decrease.

To finish off this post I will give some examples of Interest rates and use the Formula to find the number of years it will take to double the investment.

14% annual interest rate -

• 72 / 14% = 5.1 years

6% annual interest rate -

• 72 / 6% = 12 years

9% annual interest rate -

• 72 / 9% = 8 years

3% annual interest rate -

• 72 / 3% = 24 years

P.S - You can also use the number 69.3 instead of 72 as it is often more accurate. The main reason some people don't use it is because it's not the most divisible number, and using the number 72 is quicker.