The Rule of 72
This visual representation helps investors understand the power of compounding and the relationship between time and investment growth.
What is the rule of 72?
The Rule of 72 is a simple way to estimate how long it may take for your investment to double. While past performance doesn’t guarantee future results, this rule provides a useful framework for understanding potential growth. Though not a precise formula, it offers a quick way to gauge where your portfolio could be in the years ahead. For a more tailored approach, consulting a financial professional is always a wise step.
The Rule of 72 states that you can estimate the number of years it takes for an investment to double by dividing 72 by the annual rate of return.
The Rule of 72 formula
How do you calculate the rule of 72
For Example
If the annual rate of return is 6%, it would take approximately 12 years for the investment to double (72 ÷ 6 = 12).
If the annual rate of return is 9%, it would take approximately 8 years for the investment to double (72 ÷ 9 = 8).
If the annual rate of return is 12%, it would take approximately 6 years for the investment to double (72 ÷ 12 = 6).
- The horizontal axis represents time in years.
- The vertical axis represents the value of the investment.
- The diagonal line represents the growth trajectory of the investment value over time.
- The point where the trajectory intersects the dashed line indicates when the investment doubles in value.
This illustration simplifies how long it would take for each percentage rate to double the original investment.
Important !!
If you have a 21% rate on your credit card maintaining a balance, then you will pay DOUBLE the amount borrowed in less than 4 years!!
• If the annual rate of return is 6%, it would take approximately 12 years for the investment to double (72 ÷ 6 = 12).
• If the annual rate of return is 9%, it would take approximately 8 years for the investment to double (72 ÷ 9 = 8).
• If the annual rate of return is 12%, it would take approximately 6 years for the investment to double (72 ÷ 12 = 6).