What is the rule of 72? (2024)

How can you gauge the progress of your funds as they percolate in your savings and investment accounts? Just because you’re letting your accounts grow undisturbed doesn’t mean you can’t peek under the lid to see how things are going.

The “rule of 72” is one milestone that lets you quickly assess the progress you’re making toward big-picture financial goals. It is a mathematical formula that enables you to see how long it will take to double your money at a given rate of return. It’s not the only way of assessing progress, but it’s a useful way to thumbnail how quickly your funds are growing.

How the rule of 72 works

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.

But the rule’s effect is bigger than math, says Catherine Irby Arnold, who leads the Washington state market for U.S. Bank’s private wealth management practice. The rule delivers a specific result for saving a certain amount at a certain rate, and that transforms a usually abstract process into a concrete goal.

“It’s motivating,” she says. “If you save at a certain rate, you’ll double your money. It can also be a little shocking. If you haven’t started investing yet and you see that at a 7% interest rate it’s going to take you 10 years to double your money, you’d better get on it.”

The formula for the rule of 72

The classic rule of 72 formula delivers the amount of time it takes to double an investment at a given compound interest rate, meaning the interest is calculated on the initial amount and the amount of accrued interest each subsequent year. That is accomplished by dividing 72 by the expected rate of return.

Expressed as a formula, the rule of 72 looks like this:

Number of years until investment doubles = 72 ÷ Rate of return

For instance, at an annual compound rate of 6%, funds will double in 12 years.

This being a formula, it works in the opposite direction, too: You can figure the compound rate of return required to double your money in a certain time frame.

Here’s what that looks like as a formula:

Rate of return = 72 ÷ Number of years until investment doubles

For instance, to double your money in 10 years, the compound rate of return would have to be 7.2%.

Impact of inflation on the rule of 72

The rule of 72 can also be adapted to see how long it will take to halve the buying power of your money at a given rate of inflation:

Number of years until buying power halves = 72 ÷ Rate of inflation

While the rule of 72 is chugging along, lifting the value of your savings to double in a certain amount of time, inflation is also chugging along, eroding the buying power of that money. And if you’re earning nothing on your savings, the buying power of that money is cut by half in the number of years calculated by dividing 72 by the expected rate of inflation.

For example, the buying power of your money will halve in about 20 years at an inflation rate of 3.5% — about the current rate of inflation in the United States, as measured by the Bureau of Labor Statistics.

While you save for a long-term goal, be cognizant that when that goal is achieved, inflation might have eroded some of the value of your doubled money.

The accuracy of the rule of 72

While the rule of 72 is often used as a rule of thumb, it is a simplified calculation that’s best applied for estimates and does not always work out to be perfectly precise.

Stanford University provides an illustrative example: “If you divide the number given by the expected growth rate, expressed as a percentage, the answer is approximately the number of periods to double the original quantity. For instance, if you were to invest $100 at 9% per annum, then your investment would be worth $200 after 8.0432 years, using an exact calculation. The rule of 72 gives 72/9 = 8 years, which is close to the exact answer.”

However, Stanford adds that the rule of 72 is only an approximation that is accurate in a range of interest rates between 6% and 10%. Outside that range, the error can vary as little as 2.4% to as much as 14%. It turns out that for every three percentage points away from 8%, the value 72 could be adjusted by 1 to give a more precise answer.

Furthermore, the rule of 72 only works when it is applied to interest-bearing vehicles, such as savings accounts, CDs and bonds (not bond funds), says Arnold. Money put in the markets, such money invested in stocks and funds, will likely grow over the long haul, but returns will vary with the market, sometimes increasing and sometimes decreasing. So, don’t confuse the rule of 72 with market returns.

Using the rule of 72 for investment planning

The primary value of the rule of 72 is that it is helpful for envisioning a specific result that you are sure to achieve if you save a certain amount for a certain time at a certain interest rate, says Arnold.

That’s useful if you are gunning for a specific goal, such as saving for a house down payment.

“It’s a tool that can get people started in investing. It helps you keep your eye on the goal,” says Arnold. “It’s an entry point, a starting formula, to get your mind going. But it’s not the gospel and it can’t take on a lot of variables. It’s just a math equation. You have to make something out of it.”