Rule of 72

Rule of 72

The rule of 72 is an approximation tool used to determine the amount of time it will take for money to double on the earnings of compound interest.

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. Do this by taking the interest available on the investment. Then divide it by 72. This type of investing is usually fairly accurate, it is more accurate with lower interest rates than it is for higher ones. It is normally used solely for compound interest situations and is not a very good indicator if the investment earns a simple interest at the end of the investment term. This rule is most useful if an investor cannot perform an exponential function and simply needs to do simple math for an estimate of an investment.

Rule of 72 Formula

Use the following rule of 72 formula:
Doubling Time (# years) = 72/Interest Rate

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 it by dividing 8 by 72. 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.
rule of 72
See Also:
Investment Banks
NPV vs Payback Method
Internal Rate of Return Method
Weighted Average Cost of Capital (WACC)
Effective Rate of Interest Calculation

Related Blogs
Does your Accounting Department Produce Net Income?

Coaching the Entrepreneur: Learn how to know what you don’t know. How much should I spend on accounting for my company?     I have been in the accounting profession for 32 years, and for the last 6 years, I’ve owned my own consulting firm to assist companies with accounting challenges. There is one common theme that I

Read More »
Near Sourcing vs. Outsourcing: The Key to Cost-Effective Accounting Solutions

In this insightful interview, Dan sheds light on the critical role of accounting in business growth and success. Uncover the common pitfalls business owners face when overlooking accounting and how it can hinder access to loans and financial opportunities. Learn why good financial statements are vital for decision-making and attracting investors. With the NearSourcing model,

Read More »
Is Mexico the New China?

In the wake of the COVID-19 pandemic and escalating tensions with China, American companies are actively seeking alternatives to mitigate their supply chain risks and reduce dependence on Chinese manufacturing. Nearshoring, the process of relocating operations closer to home, has emerged as an explosive opportunity for American and Mexican companies to collaborate like never before.

Read More »
WIKI CFO® - Browse hundreds of articles
Skip to content