The Rule of 72 is a quick and easy way to figure out how long it will take for an investment to double in value. It's not a precise rule of thumb, but it will get you close to the answer, and the math can be done by most people in their heads.
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The Rule of 72
What Is the Rule of 72?
Investors can approach the Rule of 72 in one of two ways. You can start with either your target time period or your expected rate of return.
Let's say that you start with the time frame in mind, hoping an investment will double in value over the next 10 years. Applying the Rule of 72, you simply divide 72 by 10. This says the investment will need to go up 7.2% annually to double in 10 years.
You could also start with your expected rate of return in mind. Perhaps you expect a stock to go up in value by 15% annually. Dividing 72 by 15 gives us 4.8 -- this is how many years it will take for the stock to double, according to the Rule of 72.
Why it matters
Why the Rule of 72 matters
The Rule of 72 isn't intrinsically important, but the concept of compound interest, or compound returns, is. Albert Einstein reputedly called it "the most powerful force in the universe." The Rule of 72 is simply a mental shortcut that helps investors easily understand and apply this powerful force.
To further underscore the importance of compound returns, consider Warren Buffett. When he was around 30 years old, he became a millionaire. And when he was 56 years old, he became a billionaire.
In other words, it took Buffett about 26 years to accrue 99% of his first $1 billion. But thanks to compounding returns, his net worth soared to around $44 billion over the subsequent 26 years. As of this writing, his net worth is $121 billion, according to Bloomberg, just 11 years after being worth $44 billion.
As author Morgan Housel writes in his book The Psychology of Money: "[Buffett's] skill is investing, but his secret is time. That's how compounding works."
How it can help
How the Rule of 72 can help prioritize financial decisions
The Rule of 72 facilitates understanding regarding compound returns. And this knowledge allows you to take appropriate action in your personal financial journey.
For example, consider that the stock market goes up about 10% annually on average. Let's say that you invest your retirement money solely in an index fund for the S&P 500 and plan to retire 30 years from now. Using the Rule of 72, you would see that your investments should double roughly every 7.2 years (72 divided by 10). This allows the investments that you make this year to double four times before retirement (30 divided by 7.2).
In the above scenario, every $1,000 you invest today represents around $16,000 by retirement, based on historical averages. This knowledge might cause you to reevaluate your current financial priorities.
A proper understanding of how returns compound over time can also keep investors from taking on unnecessary risk. Anyone would love to earn 50%, 75%, or 100% in compound annual returns. But any strategy that promises returns like these is likely too good to be true. And investors simply don't need returns this high to achieve their financial goals when time is on their side.
Simply put, even modest annual gains can add up to surprising sums when given enough time. And the Rule of 72 helps investors quickly grasp the concept.
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Example
Using the Rule of 72 to guide investment decisions
I'll use Domino's Pizza (DPZ 0.01%) stock as an example of how to use the Rule of 72 to guide investment decisions. In the first half of 2023, the company grew its net income by about 10% from the comparable period of 2022. Over the last few years, management has repurchased about 2% to 3% of outstanding shares annually. And it pays a dividend that has about a 1% yield.
For the sake of simplicity, let's assume that Domino's can keep these trends going. Under these assumptions, investors can expect around a 14% total shareholder return annually (earnings growth + share repurchases + dividends).
The Rule of 72 says it will take a little more than five years for an investment in Domino's to double in value (72 divided by 14). This is far better than average stock market returns. On the surface, 14% annual returns might sound pedestrian. But the Rule of 72 shows that these returns are actually quite good over a long period of time. And it could motivate an investor to buy Domino's stock.
Of course, this is just for illustrative purposes. More would go into building an investment thesis for Domino's Pizza. But using the Rule of 72 in quick exercises like this can help filter out lower-quality ideas, leaving full attention for further digging into more promising ideas like Domino's when deciding whether or not it's actually a stock you want to add to your investment portfolio.
Jon Quast has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Domino's Pizza. The Motley Fool has a disclosure policy.
FAQs
Let's say that you start with the time frame in mind, hoping an investment will double in value over the next 10 years. Applying the Rule of 72, you simply divide 72 by 10. This says the investment will need to go up 7.2% annually to double in 10 years. You could also start with your expected rate of return in mind.
What is the Rule of 72 in simple terms? ›
Do you know the Rule of 72? It's an easy way to calculate just how long it's going to take for your money to double. Just take the number 72 and divide it by the interest rate you hope to earn. That number gives you the approximate number of years it will take for your investment to double.
What is the Rule of 72 in trading? ›
The Rule of 72 is a calculation that estimates the number of years it takes to double your money at a specified rate of return. If, for example, your account earns 4 percent, divide 72 by 4 to get the number of years it will take for your money to double. In this case, 18 years.
What is the Rule of 72 Warren Buffett? ›
The Rule of 72:
This rule is determined by dividing 72 by the annual rate of return. For instance, if you anticipate a 10% annual return on your investment, it would take roughly 7.2 years (72 divided by 10) for your initial investment to double.
How long will it take for $50,000 to double at a 15% return? ›
More precise numbers
| Rate of Return | Rule of 72 Years to Double | Logarithmic Years to Double |
|---|
| 15% | 4.8 | 5.0 |
| 16% | 4.5 | 4.7 |
| 17% | 4.2 | 4.4 |
| 18% | 4.0 | 4.2 |
15 more rowsSep 23, 2023
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Final answer:
It will take approximately 15.27 years to increase the $2,200 investment to $10,000 at an annual interest rate of 6.5%.
Does the Rule of 72 really work? ›
The Rule of 72 is reasonably accurate for low rates of return. The chart below compares the numbers given by the Rule of 72 and the actual number of years it takes an investment to double. Notice that although it gives an estimate, the Rule of 72 is less precise as rates of return increase.
What is No 1 rule of trading? ›
Rule 1: Always Use a Trading Plan
You need a trading plan because it can assist you with making coherent trading decisions and define the boundaries of your optimal trade.
Does money double every 7 years? ›
The most basic example of the Rule of 72 is one we can do without a calculator: Given a 10% annual rate of return, how long will it take for your money to double? Take 72 and divide it by 10 and you get 7.2. This means, at a 10% fixed annual rate of return, your money doubles every 7 years.
In the interview, he said the Berkshire shares would go to philanthropy. Part of the cash would go directly to his wife and part to a trustee. He told the trustee to put 10% of the cash in short-term government bonds and 90% in a low-cost S&P 500 index fund.
What is Warren Buffett's golden rule? ›
"Rule No. 1: Never lose money. Rule No. 2: Never forget Rule No. 1."- Warren Buffet.
What is the Buffett's two list rule? ›
Buffett presented a three-step exercise to help streamline his focus. The first step was to write down his top 25 career goals. In the second step, Buffett told Flint to identify his top five goals from the list. In the final step, Flint had two lists: the top five goals (List A) and the remaining 20 (List B).
What is the 8 4 3 rule of compounding? ›
The rule of 8-4-3 when it comes to compounding indicates a style of investment that accelerates growth with time. Initially, a corpus doubles within 8 years through an average annual return of 12% subsequently another doubling happens for the same period after another 4 years following its initial setting up.
Does a 401k double every 7 years? ›
One of those tools is known as the Rule 72. For example, let's say you have saved $50,000 and your 401(k) holdings historically has a rate of return of 8%. 72 divided by 8 equals 9 years until your investment is estimated to double to $100,000.
How long will it take you to double your money if you invest $1000 at 8% compounded annually? ›
The result is the number of years, approximately, it'll take for your money to double. For example, if an investment scheme promises an 8% annual compounded rate of return, it will take approximately nine years (72 / 8 = 9) to double the invested money.
What 2 things does the Rule of 72 solve for you? ›
There are two things the Rule of 72 can tell you reasonably accurately: how many years it will take to double your money and what kind of return you will need to double your money in a fixed period of time.
What are the flaws of Rule of 72? ›
Errors and Adjustments
The rule of 72 is only an approximation that is accurate for a range of interest rate (from 6% to 10%). Outside that range the error will vary from 2.4% to 14.0%. It turns out that for every three percentage points away from 8% the value 72 could be adjusted by 1.
Why is the Rule of 72 useful? ›
In terms of math, the rule of 72 is straightforward: It's a formula that enables you to see how long it will take, at a certain interest rate, to double your money. Conversely, you can see what interest rate will double your money by a certain date.
How many years does it take to double your money? ›
Very few investors know how long it takes to double their money. Rule of 72 can be of help. Divide 72 by the expected rate of return and the answer is the number of years required to double your money. For example, if a bond offers 6 percent rate of interest per year, then you will double your money in 12 years.
