24
Becoming Money $mart
Rule of 72
Have you ever heard the term Rule of 72? The Rule of 72 is an equation
that lets you estimate how long it will take to double your investment with a
fi xed annual interest rate. To use the Rule of 72, divide 72 by the annual rate of
return to fi nd the number of years it will take to double your investment. Note
that the Rule of 72 gives an estimate—not the exact answer. However, it is
useful for quick mental calculations. Naturally, the higher the interest rate, the
fewer number of years it will take to double your money.
72 ÷ Interest Rate = Number of Years to Double an Investment
Suppose that you are saving for college, and you have $5,000. You wonder
if you could double this by the time you start college in three years. You found
a great deal at a local bank for 4.5% interest on a savings account.
72 ÷ 4.5 = 16 years
(Do not convert the interest rate to a decimal for this calculation.)
The equation shows that you cannot double your money at this interest
rate in three years. This is another reminder that planning for future needs or
wants is important.
Example 1-5
Your rate of return is 6%. How many years will it take for you to double
your investment?
Start with 72
Divide by the interest rate ÷ 6
Number of years to double 12 years
You
Do the Math 1-5
If the interest rate is 3%, how many years will it take for you to double
your investment?
Start with _________
Divide by the interest rate _________
Number of years to double _________
Check
Your
Understanding
Why would you use the Rule of 72 if the answer will not be exact?
For you math
wizards, the formula
for compounding is
A = P (1 + r ÷ n)nt
where P is the original
principal, r is the
annual rate of interest,
t is the number of
years (time), and n is
the number of times
it is compounded in
a year. A, of course,
is the final amount.
Remember, this
assumes that you are
putting all your money
into your investment
at one time, and not
adding to it later.