Attention Required! Cloudflare

The rule is best used as “a quick, back-of-the-envelope type of calculation,” Berkhahn notes.. Roger Wohlner is an experienced financial writer, ghostwriter, and advisor with 20 years of experience in the industry.

  • Stocks do not have a fixed rate of return, so you cannot use the Rule of 72 to determine how long it will take to double your money.
  • This formula is a great shortcut because the full-length investment equation for compounding interest is long and complicated.
  • Applying a little bit of algebra we can rearrange the rule of 72 equation to calculate the number of years required to double your money with a given interest rate compounded annually.
  • So it’s important to do your research on expected rates of return and be conservative with your estimates.

Every investor needs dependable estimates on how much their investments will grow in the future. Professionals take advantage of complicated models to answer this question, but the rule of 72 is a tool that anyone can use. You can also use the Rule of 72 to make choices about risk versus reward. Bankrate follows a strict
editorial policy, so you can trust that our content is honest and accurate. The content created by our editorial staff is objective, factual, and not influenced by our advertisers. The chart below provides the approximate number of years for an investment to double.

The Rule of 72 is a quick and simple formula to estimate when your investments will double

The value of the rule is fairly limited in a practical sense, given the caveats and reasons to be cautious about relying on it as a forecaster of future performance, he adds. As a result, applying the rule’s money-doubling calculation may not be very precise. When the CD matures, there’s no guarantee you’ll be able to reinvest that money at the same rate of return and it could be lower. “Be very careful as far as what the maturity schedule is of that fixed income product or strategy,” Briggs adds.

  • All of this is also assuming you’re not adding to your initial investment over time, which makes the fact that your money is doubled in less than a decade all the more impressive.
  • For example, if you reinvest the dividends you earn on your investments, your earnings are being compounded.
  • The Rule of 72 is an important guideline to keep in mind when considering how much to invest.
  • On that note, using Excel (or a financial calculator) is recommended for a more precise figure, especially in higher stake circumstances.

Similarly, replacing the “R” in R/200 on the third line with 2.02 gives 70 on the numerator, showing the rule of 70 is most accurate for periodically compounded interests around 2%. As you can see from the table above, the rule of 69.3 yields more accurate results at lower interest rates. However, as the interest rate increases, the rule of 69.3 loses some of its predictive accuracy.

Rule of 72 Calculator

A financial professional will offer guidance based on the information provided and offer a no-obligation call to better understand your situation. This is the number of periods it will take the investment to double in value. Our goal is to figure out how long it takes for some money (or something else) to double at a certain interest rate. The rule of 72 is a mathematical rule that can be used to approximate how long it will take for an investment to double in value.

Does the Rule of 72 Work for Stocks?

Investors, business owners and financial planners can use the rule of 72 to project return on investment (ROI) for different strategies. The rule can also be used to estimate the impact of inflation on investments. It can also tell you the annual rate of return offered by an investment given how many years it will take to double in value. The rule of 72 is a simple way to estimate the number of years it takes an investment to double in value at a given annual rate of return. It’s calculated by dividing the number 72 by the annual rate of return. Many young adults who are starting out choose high-risk investments because they have the opportunity to take advantage of high rates of return for multiple doubling cycles.

Rules of 72, 69.3, and 69

Our editors and reporters thoroughly fact-check editorial content to ensure the information you’re reading is accurate. Our editorial team does not receive direct compensation from our advertisers. Bankrate follows a strict editorial policy, so you can trust that we’re putting your interests first. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. Investors often use this calculation when evaluating the difference between similar investments.

Rule of 72 Formula

Similarly, to determine the time it takes for the value of money to halve at a given rate, divide the rule quantity by that rate. You can also apply the Rule of 72 to debt for a sobering look at the impact of carrying a credit card balance. If you don’t pay down the balance, the debt will double to $20,000 in approximately 4 years and 3 months.

Bankrate logo

If one wants to know the tripling time, for example, replace the constant 2 in the numerator with 3. As another example, if one wants to know the number of periods it takes for the initial value to rise by 50%, replace the constant 2 with 1.5. You can use the rule to find out how inflation will impact your investments.

Lascia un commento