Investing

What is the Rule of 72?

By  Ben Le Fort

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The rule of 72 tells you how long it will take for your investment to double. The only variable you need is an estimated rate of return on your investments. You divide 72 by your annual rate of return, and that is how many years it will take to double your money.

In the world of finance, there are so many formulas and equations and acronyms it can be very intimidating for regular people who smartly, spend their time living their lives rather than obsessing over this stuff.  That is why I love the Rule of 72 so much, you don’t need a spreadsheet or any knowledge of finance to understand it.

quote - the rule of 72 tells you how long it will take for your investment to double in value

For example, let’s say I have $10,000 today and I invest in an asset that will return 6% per year. I know my $10,000 will double to $20,000 in about 12 (72÷6=12) years. You can imagine how this might be a useful rule of thumb for anyone trying to figure out how their retirement funds will be looking 10 years out.

“The rule of 72 tells you how long it will take for your investment to double.”

Applications of The Rule of 72

Comparing Investments

One obvious way to use the Rule of 72 is comparing how long we might expect it will take for different investments to double in value. Let’s compare the length of time to double an initial investment $10,000 when investing in a U.S. 3 Year Treasury Note and Vanguards S&P 500 Index fund (which I am personally invested in).

As of the date of this post:

  • the U.S 3 Year Treasury Note had a yield of 2.765%
  • The average annualized total return for the S&P 500 index over the past 90 years is 9.8% (which I will use as my expected return for this analysis).

Length of Time we expect $10,000 to double into $20,000

  • U.S 3 Year Treasury Note: 26.04 years
  • S&P 500 Index Fund: 7.35 years

If the S&P continues, near its historical average you could expect to double your investment every 7 years and 4 months. Obviously, there is a lot more volatility and risk in the market compared to U.S Treasuries but it would take a whopping 26 years to double your money investing in Treasuries.

Now consider the fact that this does not even take inflation into account! $20,000 will be worth a hell of a lot less in 26 years then it is today. Let’s rerun these numbers assuming a 2% average rate of inflation.

Length of Time we expect $10,000 to double into $20,000 in “real” terms, adjusted for inflation.

  • U.S 3 Year Treasury Note: 94.11 years
  • S&P 500 Index Fund: 9.23 years

Accounting for inflation it would take the S&P over 9 years to double its value while it would take the 3-Year Treasury over 94 Years! The old adage is true “inflation is a bond’s worst enemy”. Speaking of inflation that brings me to the final topic I want to discuss regarding the Rule of 72.

Measuring the Impact of Inflation

The rule of 72 can not only tell us how long it will take for your investments to double, but it will also tell you how long it will take for any cash you have in a checking account or under your mattress to lose half its value. Its rule of 72 works the same way for measuring the impacts of inflation 72÷” rate of inflation”.

Again, assuming a 2% rate of inflation it would take 36 years (72÷2) for your $10,000 to lose half its value if you hold it in a checking account. If inflation rose to 6% your $10,000 would lose half its value in just 12 years (72÷6).

So, there you have it, a simple and useful calculation that anybody can use to project the growth of your money in both nominal and real (adjusted for inflation) terms.

Ben Le Fort

About the Author

Ben Le Fort

Hi, my name is Ben. I am the founder of Making of a Millionaire. I have been obsessed with personal finance and learning how to manage money, ever since my parents declared bankruptcy and lost the family home to foreclosure in 2010.

I spent the next 10 years continuing my journey of educating myself about money. This education was both formal and informal.  

On formal education, I earned a Bachelor’s and a Master’s degree in Finance & Economics. 

On the informal side, I consumed every book, video, blog post, and podcast that discussed personal finance.

Education was nice, but it wasn’t until I began implementing what I learned that I began feeling more hopeful about the future. 

Before long, I had paid off my first loan. Then the next. By 2015 I was debt-free. By 2016 my wife and I bought our first house. Then we started investing. We bought another house and began building real wealth.  

As our wealth grew, the memories of that family bankruptcy seemed further and further in the rear-view mirror. My stress and anxiety began to melt away and I was able to sleep at night without my mind racing and problem-solving.

By 2018 I knew it was time to start sharing what I learned about managing money and Making of a Millionaire was born.

I hope you find the articles, videos, and courses created by Making of a Millionaire to be of value to you. Please feel free to reach out to me directly if you ever have feedback or questions.

You can read all of my articles on my personal site, or on Medium. If you’re interested in video-based personal finance tutorials and education, you can Subscribe to my YouTube channel or check out my in-depth personal finance course.

Disclaimer: The information in this article is not intended to encourage any lifestyle changes without careful consideration and consultation with a qualified professional. This article is for reference purposes only, is generic in nature, is not intended as individual advice and is not financial or legal advice.

One comment

  1. I have a (currently stagnant) Vanguard account that I hope to start contributing to again in the near future! They say that you should just “set and forget” your retirement accounts, but I must admit that I will sometimes check in on it, like a sleeping baby, just to make sure everything is OK.

    Though nothing new and important is happening with the account, I will absolutely apply the simple equation you’ve provided to help determine how long it will take to double as it stands, and then I’ll check in again once I am actively contributing again!

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