Rule of 72
The rule of 72 is a shortcut that allows non mathematicians to estimate when something will double. In this case, the rule of 72 allows investors to quickly come up with a very accurate estimate as to when their investment in something, whether it be stocks, bonds, real estate… will double.
The formula is very simple:
How many years it will take to double= 72/ return on your money.
If you think you will get a 9% return on your money then the equation goes like this:
72/9= 8 years for your initial investment to double.
A 6% return would be:
72/6= 12 years for your investment to double.
The rule of 72 is not 100% accurate for a few reasons. The first is that we are assuming you will get a flat return on your investment each year. It is unrealistic to think that you will get a 6 percent return each year. If you are investing in the stock market or in real estate you should expect very volatile returns each year, 20%, -8%, 4%, 16%… Over time your return should equal out to be roughly 7-9% but it does not always work out that way.
The rule of 72 is not set in stone. In some cases the rule of 69 or the rule of 70 will end up being more accurate then the rule of 72 will, it all depends.
The rule of 72 is not perfect, but we as investors do not need a perfect formula, far from it. All you should be trying to do is get a quick estimate as to how long it will take you for your investment to double and the rule of 72 makes it easy to do so. If you want to be perfectly precise, which is understandable, break out a calculator and start crunching numbers. If you are okay with a ballpark estimation which should be sufficient in most cases, then the rule of 72 is just what you are looking for.