The Rule of 72 | Primerica (2024)

FAQs

What is the rule of 72 answer? ›

Just take the number 72 and divide it by the interest rate you hope to earn. That number gives you the approximate number of years it will take for your investment to double.

The Rule of 72 is derived from a more complex calculation and is an approximation, and therefore it isn't perfectly accurate. The most accurate results from the Rule of 72 are based at the 8 percent interest rate, and the farther from 8 percent you go in either direction, the less precise the results will be.

The Rule of 72 is not precise, but is a quick way to get a useful ballpark figure. For investments without a fixed rate of return, you can instead divide 72 by the number of years you hope it will take to double your money. This will give you an estimate of the annual rate of return you'll need to achieve that goal.

Errors and Adjustments

The rule of 72 is only an approximation that is accurate for a range of interest rate (from 6% to 10%). Outside that range the error will vary from 2.4% to 14.0%. It turns out that for every three percentage points away from 8% the value 72 could be adjusted by 1.

The magic number

The premise of the rule revolves around either dividing 72 by the interest rate your investment will receive, or inversely, dividing the number of years you would like to double your money in by 72 to give you the required rate of return.

The Rule of 72 helps you determine how long it might take for your money to hypothetically double. It's worth noting, the “rule of 72” definition isn't necessarily perfectly accurate because past market results do not predict future market behavior.

You can also apply the Rule of 72 to debt for a sobering look at the impact of carrying a credit card balance. Assume a credit card balance of $10,000 at an interest rate of 17%. If you don't pay down the balance, the debt will double to $20,000 in approximately 4 years and 3 months.

The most basic example of the Rule of 72 is one we can do without a calculator: Given a 10% annual rate of return, how long will it take for your money to double? Take 72 and divide it by 10 and you get 7.2. This means, at a 10% fixed annual rate of return, your money doubles every 7 years.

What is the 72 formula? ›

How Do You Calculate the Rule of 72? Here's how the Rule of 72 works. You take the number 72 and divide it by the investment's projected annual return. The result is the number of years, approximately, it'll take for your money to double.

To turn $5,000 into more money, explore various investment avenues like the stock market, real estate or a high-yield savings account for lower-risk growth. Investing in a small business or startup could also provide significant returns if the business is successful.

The Rule of 72 will not work if the rate of interest fluctuates or is reset after a specific period. Moreover, the Rule of 72 works better with a lower rate of interest when compared to a higher rate of interest.

One of the best known, as well as the oldest, is the “Rule of 72” described in detail (although without derivation) by Luca Pacioli (1445–1514) in 1494. In brief, the rule of 72 allows you to calculate a good approximation to how long it will take for your money to double at any compound interest rate.

The Rule of 78s is also known as the sum of the digits. In fact, the 78 is a sum of the digits of the months in a year: 1 plus 2 plus 3 plus 4, etc., to 12, equals 78. Under the rule, each month in the contract is assigned a value which is exactly the reverse of its occurrence in the contract.

Here's how the Rule of 72 works. You take the number 72 and divide it by the investment's projected annual return. The result is the number of years, approximately, it'll take for your money to double.

The number of years it takes for a certain amount to double in value is equal to 72 divided by its annual rate of interest.

The Rule of 70, while generally more accurate, is less convenient for mental calculations due to the indivisibility of 70 by common numbers such as 3, 4, 6, 8, 9, or 12. Conversely, the Rule of 72, being divisible by those numbers, is often preferred for its ease of use despite being slightly less accurate.