The Rule of 72 is a general rule of thumb telling how long it will take your money to double at a given rate of return, known as the annual percentage rate (APR).

To use the rule, start with the number 72 and divide it by your expected rate of return. Let’s say you are earning 6% interest on an initial $1,000 investment.

72 / 6% APR=12 years.
This is how long it would take for your $1,000 to become $2,000 if you’re earning 6% APR.

The rule assumes interest is compounded yearly. Part 1 explained that often funds compound more frequently than once a year. If your interest is compounded quarterly (four times per year), you might earn even more money because the interest earned is rolled back into the principal. Then, for the next term, you will earn interest on your interest and the principal. This ultimately will result in a higher dollar amount of return, each and every period.

Pretty good, huh?

Why should you use the Rule of 72?

Well, for starters, it’s convenient.

The Rule of 72 helps you do estimates when you don’t have access to a sophisticated calculation program. The rule is most accurate when working within the 6-10% range.

When working with larger sums of money, you will need higher interest rates to double your money, and will have to look into alternate investments outside of banking options (stocks, gold, etc.).*

Remember, The Rule of 72 is a powerful tool. It can work for you, making you wealthy, or it can work against you, leading to financial quicksand.

It is up to you to be informed of your investing and borrowing decisions and to use compound interest to your advantage!

*Higher interest rates generally come hand-in-hand with higher risk, so be mindful of where and how you invest your money. Higher risk, higher return. Less risk, less return.

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