Updated on: June 23, 2021 ; Wealth & Value
Rule of 72:
In this short article, we will look at a shortcut to calculate the investment doubling time. We popularly know this shortcut as the Rule of 72.
Basically, it provides a quick way of roughly computing your investment doubling time. This helps you calculate how many years it will take to double your initial investment value. All you have to do is simply divide 72 by the rate of return (you have to consider the rate as integer and not as a percentage). And you get the number of years needed to double your investment.
So, if your rate of return is 9%, then you divide 72 by 9 (not by 0.09). You get 8 years as the time required to double your initial investment value. Now, please note that this is just an approximate rule for the back of the envelope calculation.
Let’s see how did we come up with this approximate rule of 72. The table below lists the exact time required to double your investment (in years) for different ‘rate’ scenarios.
Now, the last column is the number you get when you multiply the time (in years) and the required rate needed for doubling your investments. This is the backward calculation to figure out the magic number.
If you look closely, you will notice that this number lies in the range of 71 to 75 for acceptable returns rates (5% to 17%). Normally, you would expect your investments to have a return rate of 8%-15%. This is what I am terming as the acceptable return rate. So, in this normal range of returns, 72 sits in the sweet spot.
Although, for extreme cases, this rule will not be valid. You can see that as the return rate goes beyond 20%, this number approaches 77.
If you are in a very aggressive market and are expecting returns in the range of 20% to 25%, then you can alter 72 to 76 to get a better estimate.
So, now you know how to quickly compute your investment doubling time.