The Rules Are There Are No Rules… Except The Rule of 72

By Megan Kowalski on May 19, 2022

Many of us are still reeling from compounding interest and its superpowers. With this foundational understanding, the next question on my many investor’s minds remains, “when will I double my money?” Lucky for us, there is a way to project when that will happen! One of the most simple yet insightful calculations is The Rule of 72.

What is The Rule of 72?

 A formula where the investor can project when their investments will double. This is determined with the following calculation:

Let’s work through two examples to demonstrate the power of this Rule.

Example 1 – Solving for the number of periods

An investor has $5,000 to invest, and they want to know how long it will take their investment to double with an annual rate of return of 8%. When you take 72 divided by 8, we see that it takes 9 years for the investment to double.

Example 2 – Solving for the required annual rate of return

The Rule of 72 can also be used to back into different investment goals. For instance, let’s approach the same situation differently. This time, the investor wants to know what rate of return they will need from their investments to double their money in 5 years. In this case, we can calculate by using the following:

When we take 72 divided by 5, it shows that the investment needs to generate a 14.4% annual return to meet that 5-year goal.

Anything else to note?

Keep in mind that you can only apply this Rule to compounding growth. In other words, you can only use it for investments that earn compound interest, not simple interest. With simple interest, you only earn interest on the principal amount you invest.[1] Additionally, this assumes that there are no contributions or distributions made for the investment throughout this period.

The Rule of 72 can be helpful when investors are trying to establish their risk tolerance. Moreover, it should also demonstrate if that tolerance pairs with the overall investment goals they are looking to achieve.

I hope that today’s blog has helped sharpe-n your knowledge of the investment landscape. If you have any topic suggestions or have further questions, please reach out to mkowalski@hightoweradvisors.com.

[1] https://www.businessinsider.com/rule-of-72