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Rule of 72
Einstein’s Rule of 72 is considered one of the most important investment tools ever formulated. To calculate how
soon and/or at what interest rate one’s investment money will double by POC, the Rule of 72 is a simple formula to use.
Table 3
Table 3 shows how to apply the Rule of 72 to calculate the number of years required to double an investment.
· 72 is the fixed number.
· 72 is divided by the interest rate.
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TO FIND THE NUMBER OF YEARS REQUIRED
FOR AN INVESTMENT TO DOUBLE |
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72 = Number of Years Required for an Investment to Double
Interest
Rate |
Question: If an investor earns 8% interest, compounded annually, how many years are required for his/her
investment to double?
Answer: To calculate the number of years required for the investment to double, divide 72 by 8. The
answer is 9 years.
Table 4
Table 4 shows how to apply the Rule of 72 to calculate the interest rate required to double an investment
in a specified number of years.
· 72 is the fixed number.
· 72 is divided by the number of years.
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TO FIND THE INTEREST RATE REQUIRED
FOR AN INVESTMENT TO DOUBLE |
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72 = Interest Rate Required to Double an Investment Number of Years
in a Specified Number of Years |
Question: If an investor wants to double his/her money in 5 years, what interest rate is required?
Answer: To calculate the interest rate required, the investor would divide 72 by 5. The answer is 14.4%
Calculation of Compounding by Rule of 72
Vs.
Actual Value Calculated by Computerized Compound Interest Calculator
Table 5
Table 5 shows the difference in the end values of a one-time investment of $10,000 (in 9-year increments),
using the Rule of 72* vs. using a computerized compound interest calculator.** In both examples, the interest rate is 8%,
compounded annually, and the duration of the investment is 54 years.
|
Year |
Rule of 72
in $ |
Computerized Calculations
in $ |
|
0 |
10,000 |
10,000.00 |
|
9 |
20,000 |
19,990.05 |
|
18 |
40,000 |
39,960.19 |
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27 |
80,000 |
79,880.61 |
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36 |
160,000 |
159,681.72 |
|
45 |
320,000 |
319,204.49 |
|
54 |
640,000 |
638,091.26 |
Note: The values in the above table differ only slightly between the two methods of calculation used.
The Rule of 72 is a reliable tool for investment purposes, as long as the interest rate is less than about 20%. At higher
interest rates, significant errors occur.
*moneychimp. Rule of 72 calculator. http://www.moneychimp.com/features/rule72.htm
**1728 Software Systems’ Compound Interest Calculator. [Computerized]
http://www.1728.com/compint.htm
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