As the Holiday season fast approaches we are going to provide our clients with the gift of knowledge with a deep dive into the Rule of 72.
The Rule of 72 is one of the most useful mental shortcuts in personal finance. This trick provides a quick way to estimate how long it will take for an investment to double in value, given a specified annual rate of return.
The formula is simple: divide 72 by the annual return rate (expressed as a percentage). The answer gives you the approximate number of years required for your investment to double. The Rule of 72 calculation helps investors quickly see the dramatic effect that different rates of return can have over time.
If your investment grows at 6% per year, you divide 72 by 6 to get 12 yrs
The above example shows that your money will double in about 12 years. If the rate of return were higher, say 9%, the doubling time is shortened to 8 years (72 ÷ 9). At 12%, the same investment doubles in just 6 years.
The Rule of 72 works because it's a close approximation of the compound interest formula, which uses more complex logarithms. While the Rule of 72 is not perfectly precise, it's accurate enough for interest rates between 6% and 12%, which cover the typical range of stock market returns and other consumer rates. At very low-end or very high-end of interest rates, the actual math may differ slightly, but the rule remains a helpful guideline.
Importantly, the Rule of 72 can also be reversed. Instead of calculating how long it will take to double, you can calculate what rate of return is required to double your money within a certain period. For instance, if you want to double your money in 10 years, divide 72 by 10. The result, 7.2%, tells you the annual return you need. Wanting to double your money in 7 years, you need a 14.3% return (100/7=14.3%).
Here's a "real life" theoretical usage of the Rule of 72. Hypothetically we have a 50-year-old investor that is going to take S&P 500 risk, hoping to take advantage of the 50-year average annual return of the S&P 500 which is approximately 10%. If this investor has $500,000 in an IRA account, they could potentially anticipate having $1,000,000 at age 57 and $2,000,000 at age 64.
The rule is helpful beyond investments
Here's another example of the usefulness of the Rule of 72. Theoretically, with inflation at 4%, the cost of goods and services doubles in approximately 18 years (72 ÷ 4). This "rough math" highlights how inflation can quietly erode purchasing power over time. One of the most pressing recent threats to retirees has been the persistent inflation pressures since 2021 eroding purchasing power.
In essence, the Rule of 72 makes the power of compounding easy to understand and compute. It reminds investors and savers alike that even small differences in return rates or inflation rates can have a large impact on long-term wealth and financial security.
The WT Wealth Management Learning Spotlights are designed to inform, inspire, and foster meaningful dialogue between our clients and the WT Wealth Management team. Our goal is to demystify complex economic and investment topics, offering clear, practical insights that connect financial theory to real-world decisions.
At this time, we would also like to wish our entire WT Wealth Management family a safe, joyous and wonderful Holiday season. We are so grateful for our clients that entrust their wealth management needs to our dedicated team of investment professionals.
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