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- The accuracy of the Rule of 72 depends on several factors, such as the interest rate, the frequency of compounding, and the length of time the investment is held.
- Another use for the rule is to demonstrate, or estimate, the long-term effects of interest on a loan.
- The Rule of 72 estimates the time needed to double the value of an investment.
- For lower annual rates than those above, 69.3 would also be more accurate than 72. For higher annual rates, 78 is more accurate.
- If you want more control over your investments consider a brokerage that doesn’t charge commission fees, like Charles Schwab or Fidelity.
- The Rule of 72 uses the number 72, while the Rule of 73 uses the number 73.
The Rule of 72 can be leveraged in two different ways to determine an expected doubling period or required rate of return. Before investing, it’s always prudent to carry out thorough due diligence to understand the potential risks of any investment and how these risks impact estimated returns. The Rule of 73 is considered to be slightly more accurate than the Rule of 72. This is because it takes into account the effect of compounding more frequently than the rule of 72. The Rule of 73 is also a better estimate of the years it takes for an investment to double when the interest rate is above 10%.
In the end, though, nothing can beat doing a true compound interest calculation. The formula above can be used for more than calculating the doubling time. If one wants to know the tripling time, for example, replace the constant 2 in the numerator with 3. As another example, if one wants to know the number of periods it takes for the initial value to rise by 50%, replace the constant 2 with 1.5.
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For rates of return that range from 6% to 10%, 72 is the optimal number to use. If you’re looking at potential returns of less than 8%, a good rule of thumb is to subtract 1 from 72 for every 3 points lower than 8%. Every investor needs dependable estimates on how much their investments will grow in the future. Professionals take advantage of complicated models to answer this question, but the rule of 72 is a tool that anyone can use. Let’s assume you have $10,000 to invest in a mutual fund and you want to know how long it will take to become $20,000. You are positive that you can get an average return of 8 percent each year.
The chart below provides the approximate number of years for an investment to double. Yet, despite the simplicity of the calculation and convenience, the methodology is rather accurate, within a reasonable range. Professors sometimes use the rule of 72 to teach how the value of money over time relates to inflation. For example, if inflation is at 6%, the purchasing power of a current dollar will only be half as much in about twelve years (72/6).
- Let’s assume you have $10,000 to invest in a mutual fund and you want to know how long it will take to become $20,000.
- J.P. Morgan Wealth Management is a business of JPMorgan Chase & Co., which offers investment products and services through J.P.
- The rule is a shortcut, or back-of-the-envelope, calculation to determine the amount of time for an investment to double in value.
- Get relevant tips and viewpoints to help you make smart investment decisions, powered by the expertise of J.P.
For maximum accuracy—particularly for continuous compounding interest rate instruments—use the Rule of 69.3. Samuel serves as Senior Vice President, Chief Investment Officer for the Crews family of banks. He manages the individual investment holdings of his clients, including individuals, families, foundations, and institutions throughout the State of Florida. Samuel has been involved in banking since 1996 and has more than 20 years experience working in wealth management. A Free Google Sheets ROI Calculator Template to measure an investment or business venture success by measuring the return relative to the cost invested. Whenever you are looking for a back of the napkin estimate of how long it takes for an investment to double, you can use the Rule of 72.
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The Rule of 72 is a quick and easy method for determining how long it will take to double an investment, assuming you know the annual rate of return. While it is not precise, it does provide a ballpark figure and is easy to calculate. Investments, such as stocks, do not have a fixed rate of return, but the Rule of 72 still can give you an idea of the kind of return you’d need to double your money in certain amount of time. For example, to double your money in six years, you would need a rate of return of 12%. Another limitation is that the rule of 72 does not take into account inflation or taxes, which can significantly impact the value of an investment over time. Therefore, using the Rule of 72 in conjunction with other financial planning tools, such as a retirement calculator, is vital to get a more accurate picture of your financial situation.
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You can use the rule to find out how inflation will impact your investments. Dividing 72 by the inflation rate yields the information that your money will lose half of its purchasing power in nine years. One thing to keep in mind is that this method does not take into consideration other future factors that could derail your investment a guide to financial leverage plans. For instance, inflation rates might change over the course of your investment’s life. You can however use the rule of 72 to calculate the effects of inflation on your money. For example, if the inflation rate went from 3 percent to 4 percent, your money will lose half of its value in 18 years instead of 24 years.
Rule Of 72: Definition, Formula & Uses
In addition to a decade in banking and brokerage in Moscow, she has worked for Franklin Templeton Asset Management, The Bank of New York, JPMorgan Asset Management and Merrill Lynch Asset Management. She is a founding partner in Quartet Communications, a financial communications and content creation firm. A headache-inducing derivation is beyond the scope of this article, but if it were to be done, it would actually yield the Rule of 69.3. Since that isn’t a very easily divisible number, 72 works a little better. Some suggest that 69 is more accurate when used for continuous compounding.
A simple interest rate does not work very well with the Rule of 72. The rule of 72 primarily works with interest rates or rates of return that fall in the range of 6% and 10%. When dealing with rates outside this range, the rule can be adjusted by adding or subtracting 1 from 72 for every 3 points the interest rate diverges from the 8% threshold. For example, the rate of 11% annual compounding interest is 3 percentage points higher than 8%.
To use the rule, divide 72 by the investment return (the interest rate your money will earn). The answer will tell you the number of years it will take to double your money. The Rule of 72 applies to cases of compound interest, not simple interest. Simple interest is determined by multiplying the daily interest rate by the principal amount and by the number of days that elapse between payments.
Does the Rule of 72 apply elsewhere?
The Rule of 72 can be used for any asset that grows at a compounded rate. Compounding returns is a powerful force when it comes to saving and investing, since interest is calculated both on the initial principal plus accumulated interest from previous periods. The Rule of 72 is a simple way to determine how long an investment will take to double given a fixed annual rate of interest. Dividing 72 by the annual rate of return gives investors a rough estimate of how many years it will take for the initial investment to duplicate itself.
How to Adjust the Rule of 72 for Higher Accuracy
The Rule of 72 can be calculated by dividing 72 by the rate of return an investment earns. To determine the time it takes for money’s buying power to halve due to inflation, financiers divide 70 by the inflation rate, which is the Rule of 70. That’s all it takes for a credit card company to earn double your money. The higher the interest rate, the more you’ll owe to your lenders. The Rule of 72 is a “back of the envelope” estimate of the time to double an investment, yet the method produces a relatively accurate figure. In practice, the Rule of 72 is a “back-of-the-envelope” method of estimating how long it would take an investment to double given a set of assumptions on the interest rate, i.e. rate of return.
If you want to know how long it will take you to double your investment at a specific fixed interest rate, the rule of 72 is the fastest way to do so. But even if you’re not looking to multiply your money twofold, knowing the period of time it would take to do so can help you infer when you would reach your goal portfolio size. The Rule of 72 gives an estimation of the doubling time for an investment. It is a fairly accurate measurement, and more so when using lower interest rates rather than higher ones.
When calculating the Rule of 72 for any investment, note that the formula is an estimation tool and the years are approximate. The Rule of 72 mainly works with common rates of return that are in the range of 5% to 12%, with an 8% return as the benchmark of accuracy. Lower or higher rates outside of this range can be better predicted using an adjusted Rule of 71, 73 or 74, depending on how far they fall below or above the range. You generally add one to 72 for every three percentage point increase.
We do not manage client funds or hold custody of assets, we help users connect with relevant financial advisors. The first individual to mention the rule of 72, though, is Luca Pacioli, a renowned mathematician from Italy. Over the next 10 years, the markets could deliver a higher or a lower return than what averages lead you to expect. Someone on our team will connect you with a financial professional in our network holding the correct designation and expertise. Our writing and editorial staff are a team of experts holding advanced financial designations and have written for most major financial media publications. Our work has been directly cited by organizations including Entrepreneur, Business Insider, Investopedia, Forbes, CNBC, and many others.