What is the rule of 72?

The rule of 72 is something that I learned about in a formal finance class. The professor only talked about it because most of us aren’t finance majors. What the rule of 72 does is to give you a quick estimate an investment’s doubling time. This is can be used on interest-paying investments such as CD’s, Bonds, or T-Bills. It will give you an estimated time period for the investment doubling time.



When You Shouldn’t Use The Rule of 72

There are functions in Microsoft excel and on financial calculators that will give you a more accurate answer to bonds doubling time. If you have access to anything more advanced, you should choose that over using the rule of 72. Historically this would have made sense for everyone to use. Before there were calculators that would solve a problem like this within seconds, this would have had a lot of real world application.

Why Would You Use this?

The rule of 72 is something that is used for a quick estimate. This is  used by people who aren’t formal finance people and don’t have access to financial tools of professionals. to get a quick idea of bonds doubling time. Most people can use this simple rule because we know how to quickly divide using a calculator or even in our heads.

How is this Calculated?

Let’s say like we have a bond that pays 9 percent interest. In this example, we would easily be able to see that 8 times 9 equals 72. That means a bond paying 9 percent interest would double in 8 years approximately because 72/9= 8 years.

Rule of 72 Calculations Table

Interest Rate Years To Double
12 6
11 6.5
10 7.2
9 8
8 9
7 10.3
6 12
5 14
4 18
3 24
2 36
1 72




Final Thoughts

The rule of 72 should only be used if you don’t have any other way to make this calculation; On the other hand, it is the easiest and quickest way you could estimate how long an investment will take to double.

 

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