When comparing different fixed-income investments, which factors do you look at? One that can be helpful to consider (and fairly simple to mentally calculate) is the Rule of 72. Let's look at this calculation and how it can be used.
Take quiz: How to pick an investment account
What is the Rule of 72?
The Rule of 72 is a quick formula that allows you to estimate how long it’ll take for a fixed-income investment (such as corporate or government bonds) to double in value. It’s based on a fixed annual rate of return on investments that compound annually, and is generally considered to work best for rates in the range of 6% to 10% — and also with the understanding that because the formula uses a single rate of return, it doesn’t account for rate changes, account fees, withdrawals or contributions , nor does it apply to the equity market for assets such as stocks or index funds.
Rule of 72 calculator
Let's dig into the Rule of 72 formula:
72 / Interest Rate = Years to Double
Note that you should use the full value of your rate of return. For example, if you have an interest rate of 8%, just use the number 8 (not 0.08). Or you can use this handy calculator:
Rule of 72 examples
Let’s say you plan to invest $2,500 in a fixed-income asset, and you’re wondering how long it’ll take you to double your money to $5,000. Your fixed rate of return is currently 9%. The formula looks like this: 72/9 = 8.
In this case, it’ll take approximately eight years for your money to double to $5,000. As you can see, the Rule of 72 focuses on the fixed rate, not the initial amount you have to invest.
One important note to remember is that interest rates don’t stay the same over the course of time. Interest rates can be volatile and vary from year to year, even dipping into negative return territory. Therefore, it’s important to take that into consideration as you use the Rule of 72. It’s meant to be a quick mental gauge — not an end-all-and-be-all of calculations.
Read more: Is there a best time to invest?
Rule of 72 chart
The Rule of 72 chart demonstrates how a higher compound interest rate doubles your money:
Interest rate | Rule of 72 calculation | Years to double your money |
|---|---|---|
6% | 72/6 | 12 years |
7% | 72/7 | 10.3 years |
8% | 72/8 | 9 years |
9% | 72/9 | 8 years |
10% | 72/10 | 7.2 years |
What's the difference between the Rule of 72 and the Rule of 69.3?
The Rule of 72 is focused on annual rates of return, but if you want to determine a daily or continuous compounding interest example, you may get better results by using 69.3 instead of 72. Here’s how it works:
Let’s say you have an interest rate of 9%. Just divide it by 69.3:
69.3 / Interest Rate = Years to Double
69.3 / 9 = 7.7
In this case, the rule of 69.3 says that it would take 7.7 years for an investment to double, instead of the 9 years under the Rule of 72.
Limitations of the Rule of 72
The Rule of 72 is meant to be an estimate for annually compounded rates, so it's not going to give you an exact view of your returns — and it isn't intended for use with equity investments, which tend to be more volatile.
The Rule of 72 also works best with rates of return between 6% and 10%. If you're looking at a rate beyond that, you can add or subtract 1 from 72 for every 3 points the interest rate diverges from 8%. For example, the rate of 11% is 3 percentage points higher than 8%, so you would add 1 to 72 to get 73 and calculate from there.
Benefits of the Rule of 72
The biggest benefit of the Rule of 72 is it's simple and can give you a quick idea of how long it would take to double your investment.
When is this useful? If you're comparing fixed-income investment choices, it can be a factor in understanding the different annual rates of return. It can be tough to grasp 6% versus 8%; it's easier to visualize 12 years versus 9 years as the time it takes for an investment to double in value.
What about equity investments?
Equity investments, such as stocks or index funds, experience more frequent price fluctuations, relative to fixed-income investments. For that reason, the Rule of 72 is not a recommended gauge for those types of investments — instead, try using a more thorough retirement calculator that accounts for volatility or consider working with a financial advisor to help answer your questions.
Read more: Is a robo or financial advisor a better fit for you?
Get the big picture
You may not want to use the Rule of 72 when you want a picture-perfect view of your returns. However, if you want to get a rough idea of how long it will take to double a fixed-income investment based on a fixed rate of return, the Rule of 72 is your friend.
