Imagine living in your dream home and living the life you want as you enjoy retirement. How much money do you think you’ll need to turn these visions into reality?
These major life goals tend to come with high price tags. You might need to double the money you have now, then double it again many times over to reach your target amount.
You may ask yourself; how long do I need to invest to make these goals a reality? To find out, a quick method you can use is the rule of 72. Learn what it is and how it works below.
What is the rule of 72?
The rule of 72 is a formula for calculating how many years it will take to double your money given a certain rate of annual return. To use it, you’ll simply divide 72 by your expected rate of return.
While it is closely linked to Albert Einstein, there’s no evidence on who really invented it. The earliest recorded mention of it was in the 1494 book Summa de Arithmetica of Luca Pacioli.
You can use this formula to see how your expected returns will compound annually.
Compounding is what happens when the money you earned starts earning money for you.
Here’s a sample computation:
Say you expect to earn 6% every year on an investment.
Divide 72 by 6 to get the number of years to double your money. The result is 12 years.
If your initial investment is P100,000 and it grows 6% every year, you’ll have P201,219.6 after 12 years if you continue to reinvest your profits in the same investment product.
| Timeline | Compounded annual growth (6%) |
| Year 0 | P100,000 |
| Year 1 | P106,000 |
| Year 2 | P112,360 |
| Year 3 | P119,101.6 |
| Year 4 | P126,247.7 |
| Year 5 | P133,822.6 |
| Year 6 | P141,851.9 |
| Year 7 | P150,363 |
| Year 8 | P159,384.8 |
| Year 9 | P168,947.9 |
| Year 10 | P179,084.8 |
| Year 11 | P189,829.9 |
| Year 12 | P201,219.6 |
The math isn’t exact, but it provides a close estimate of when your money would double. Take note that this formula works best with moderate annual growth rates of 5% to 10% and tends to be less accurate as the rates go lower or higher.
Should you use the rule of 72?
This rule is good for quickly estimating the potential growth of an investment over time, but it’s important to note that the result is just an approximation. Still, it may prove useful in these instances:
- Easy estimation
You can do a quick mental math to get a ballpark figure for how long your investment will take to double. It can come in handy when planning for long-term goals or checking your progress.
- Quick comparison
You can compare your investment options against your goals based on the expected returns.
- Power of compounding
It can help you understand the power of compound interest. You’ll see in a simplified way how your money might grow faster the longer it is invested.
Keep in mind that the rule of 72 is far from perfect. It assumes that your rate of return will remain the same every year, which is often not the case in real life.
Stock market returns, for example, can go up and down from day to day and year to year. There are other factors that can lower your actual earnings, like taxes, investment fees, and inflation.
Aside from potential returns, you should also consider your goals, strategy, and risk tolerance when weighing investment options.
While the rule of 72 is quick and easy to use, it should always be combined with detailed research and analysis before you make investing decisions.
