The Rule of 72

Over the weekend, I read another great book, The Four Pillars of Investing by William Bernstein. I am not going to give a review this time around, but I am going to discuss on one of the concepts mentioned in the book: The Rule of 72. Honestly, it was the first time I knew it and I thought I would like to share it here in my blog.

According to Wikipedia, it is a method for estimating an investment's doubling time. The rule number (e.g., 72) is divided by the interest percentage per period to obtain the approximate number of periods (usually years) required for doubling. Although scientific calculators and spreadsheet programs have functions to find the accurate doubling time, the rules are useful for mental calculations and when only a basic calculator is available.

For example, if you want to know how long it will take to double your money at eight percent interest, divide 8 into 72 and get 9 years. Below is a table to shows how accurate the rule is.

As you can see from the above, the rule is remarkably accurate. So long the interest rate is less than about twenty percent, it is rather reliable formula. At higher rates the error starts to become significant.

You can also run it backwards such that if you want to double your money in six years, just divide 6 into 72 to find that it will require an interest rate of about 12 percent.

Watch this video from Investopedia to understand more about The Rule 72.