by: Katherine Santiago
What is the rule of 72?
The rule of 72 is a simple formula that is used to calculate the estimated amount of time it will take to double an investment that is being compounded with a fixed rate of return.
To put this equation to use, simply divide 72 by the fixed rate of return of an investment.
Applying the rule of 72
Let’s say, for example, you are investing $20,000 at a fixed annual interest rate of 8%. Here’s how you can use this simple equation to calculate how soon your investment will double.
72÷8 (fixed rate of return) = 9 (estimated amount of years it will take to double your principal investment)
This example tells you that if you are receiving an 8% fixed return on your investment, it will take you approximately 9 years to double that $20,000 investment.
How investors can use the rule of 72 for investment planning
The rule of 72 can help investors determine how their investment plan will line up with their financial or retirement goals.
For example, if you have invested into a fixed return fund that will yield a 6% rate of return annually, it will take you about 12 years to double it. Investors can also use this rule to calculate the percentage of return needed to double their investment within a particular time period. So, to put this into perspective, let’s say you want to invest $100,000 into a fund, but need to decide which type of investment fund will help you double your investment in 15 years. You would take the variable of 15 and plug it into the rule of 72 equation.
72÷15 (the amount of years in which you’d like to double your investment) = 4.8 percent
Knowing the minimum fixed rate of return needed to achieve your investment goals can help you decide which type of fund is suitable for your specific investment timeline and goals.
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