The Rule of 72 is a formula to determine the number of years it will take to double your money under a fixed interest rate or a fixed rate of return.
Saving and investing can be full of unknowns. How fast will your money grow? When you use an account with a fixed interest rate or an investment with a fixed rate of return, use the Rule of 72 to calculate how long it will take for your money to double.
The Rule of 72 is a simple formula that tells you how long it will take to double your investment.
The calculation is easy: just divide the annual interest rate by 72. The answer will be the number of years it will take to double your funds.
Here’s an example: Let’s say you invest $1,000 in a 20-year US Treasury bond that earns a 2.18% fixed annual interest rate. Here’s the math for the Rule of 72:
72 divided by 2.18 = 33.6 years.
In a 20-year Treasury bond, it would take about 33 and a half years to double your money.
For the record, if that feels like a long time, Treasury bonds are designed as secure and stable investments. They’re protected by the US government, so they’re a safe place to keep money, and earning a fixed rate provides secure growth too. There’s also no limit on their government protection, so you can safely store more than a CD or savings account, which carry a $250,000 FDIC limit.
The Rule of 72 only works with fixed or very low interest rates, and when the rate of rate varies, like on stocks or some mutual funds, the formula doesn’t work at all.
Some investments can increase in value quickly, just like they can drop in value too. For those, projecting growth requires factors and formulas more complex than the Rule of 72.
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With a postgraduate degree in commerce from The University of Sydney, Pranay has his finger on the pulse of the finance industry. Breaking down complex financial concepts is his forte.