Rule of 72 Definition
Rule of 72 Definition

Rule of 72 Definition

The rule of 72 definition is an approximation tool used to determine the amount of time it will take for money to double on the earnings of compound interest. The Rule of 72 is also used to calculate the rate of return necessary to double an investment in a specific amount of years.

Rule of 72 Explained

The rule of 72 is essentially an estimation for determining the amount of years or the doubling time of an investment. This is done by taking the interest available on the investment and dividing it by 72. Rule of 72 investing is usually fairly accurate. It is even more accurate with lower interest rates than it is for higher ones. Use he rule of 72 for compound interest situations. If the investment earns a simple interest at the end of the investment term, then this rule is not a very good indicator. The rule of 72 is most useful if an investor cannot perform an exponential function and simply needs to do simple math for an estimate of an investment.
A lower compound interest rate means that the investment will take longer to double. Whereas, a higher interest rate means that the investment will be doubled quicker. Thus, a higher interest rate and a lower doubling time are necessary for an investment to grow faster. Usually, a riskier investment will yield a higher interest rate and a higher return in less time. If you are planning on saving or investing your funds, then it is important for you to compare different interest rates so that you can maximize the value of your investment in the shortest amount of time. Since the rate of returns for investments vary with time, use the Rule of 72 as a quick tool. But do not use it as a full solution for analyzing the future value of investments.

Rule of 72 Formula

The rule of 72 formula is as follows:

Doubling Time (# years) = 72/Interest Rate

Rule of 72 Example

What is the doubling time for an investment with a compound interest rate of 8%? A person using the rule of 72 equation would find the doubling time equal to 9 years. Calculate this by taking 72 and dividing it by 8. By performing this the investor can tell that it will take approximately 9 years to double the principal. It is fairly accurate as the exponential function yields an actual doubling time of 9.006 years. If you want to calculate the interest rate necessary to double your funds for a specific number of years, then divide 72 by the doubling time (# years).
Rule of 72 Definition


The Accounting Gap Between Large and Small Companies

The Accounting Gap: It’s unfortunate, but true. A large gap exists between the accounting departments of large or publicly traded companies and smaller or private companies. In our past 25 years of consulting we’ve noticed that more often than not, these smaller/private companies will fill the gap with Bookkeepers, rather than the degreed Accountants/CPAs they

Read More »

The Struggles of Private Company Accounting

Building your Accounting Department… When I meet a business owner operating at a successful $10+ mil in revenue I often hear them say “My CPA…” and I immediately know they are referring to a tax CPA. One thing ALL entrepreneurs have in common is that they have to file a tax return. So from day

Read More »

Financial Ratios

See also:Quick Ratio AnalysisPrice to Book Value AnalysisPrice Earnings Growth Ratio AnalysisTime Interest Earned Ratio Analysis Use of Financial Ratios Financial Ratios are used to measure financial performance against standards. Analysts compare financial ratios to industry averages (benchmarking), industry standards or rules of thumbs and against internal trends (trends analysis). The most useful comparison when

Read More »


Financial Leadership Workshop

MARCH 28TH-31ST 2022


Financial Leadership Workshop


June 12-15th, 2023

WIKI CFO® - Browse hundreds of articles