What is the rule of 72?

The rule of 72 is a simple formula that tells you the approximate amount of time or interest rate needed for an amount to double. The formula is Years X Rate per year = 72.

Here’s how it works. If you invest an amount for 8 years at 9% annual interest it will double (because 8 years X 9% = 72). If you invest an amount for 9 years at 8% it will also double (since 9 years X 8% = 72). If your investment earns 6%, it will take 12 years for it to double (since 12 years X 6% = 72; or 72 divided by 6 = 12).

If you invest $1,000 at 12% compounded annually, it will grow to approximately $2,000 in 6 years (6 X 12 = 72; or 72/12 = 6). If the $2,000 continues to earn 12% each year, six years later the investment will be worth $4,000. If the investment continues to earn 12% per year, then in six more years it will have a value of $8,000.

If successful investors were able to earn 18% each year, the value of their portfolios would have doubled every four years (72 divided by 18 = 4). If the investors live a long life and continue to earn 18% compounded annually they will become very wealthy.

About the Author: Harold Averkamp (CPA) has worked as an accountant, consultant, and university accounting instructor for more than 25 years.

He is the author of the 2010 Master Accounting Download Package which has been praised for it's ability to simplify accounting in a way that anybody can understand.