Rule of 72
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The rule of 72 is an estimating tool that is useful when making financial decisions regarding how long it would take your investment to double using annual compounding interest. (Source: Wikipedia) This is not to be confused with daily compounding interest for which you would be using the rule of 69.3.
For informational purpose, TheLocomono is posting this article to provide you with an easy reference source. MoneyChimp has blessed us with a nifty Rule of 72 calculator which you can find located in the side bar on Just Personal Finance.
| Rate of Interest | Actual Years | Rule of 72 |
| 2% | 35.0 | 36 |
| 4% | 17.7 | 18 |
| 6% | 11.9 | 12 |
| 8% | 9.0 | 9.0 |
| 10% | 7.3 | 7.2 |
| 12% | 6.1 | 6.0 |
| 14% | 5.3 | 5.1 |
| 16% | 4.7 | 4.5 |
| 18% | 4.2 | 4.0 |
| 20% | 3.8 | 3.6 |
| 24% | 3.2 | 3.0 |
| 28% | 2.8 | 2.6 |
Why is it important to know about the Rule of 72?
Simply put, knowledge gives you choices. So having the knowledge about the Rule of 72 can help you make financial decisions regarding your personal financial situation. After all, in the world of finance, they say time is money.
For example, if you were interested in CD laddering (Read Cash Money Life’s How to Build A CD Ladder) which typically offers a low interest rate based on the Federal Reserve Board interest rates (See Federal Funds rate from 1990 to present here). Purchasing CDs at an annual interest rate of 4 percent would take you roughly 18 years to double your money.
Likewise, if you were interested in short to mid-range investing, you may want to invest in a mutual fund that averages an 8 percent annual return on your investment. Using the rule of 72, it would take you 9 years to double your money using the power of annual compounding.
Time certainly flies when the return on your investments doubles every 3 to 5 years at an annual interest ranging from 14 to 28 percent. There are various investment opportunities that allows you to do this. It is important to do your research and understand the risk you are taking on to achieve such return.
This is a perfect example of where it pays to learn. In fact, you are paying yourself to learn the power of annual compounding through the Rule of 72 with your investments.
Comment by Patrick on 17 March 2008:
I love the Rule of 72! It’s a great tool for a quick estimation. Great article, and thanks for the mention!
Patrick’s last blog post..How I Earned $4,100 Without Working - The Beauty of Passive Income
Comment by Mark from TheLocoMono on 19 March 2008:
Glad to mention your article. I thought of it immediately when I was writing about CD laddering. Yeah, Rule of 72 Rocks!
Mark @ TheLocoMono’s last blog post..A Review of Roots : The Saga of an American Family
Comment by hank on 20 March 2008:
I’ve been a fan of the power of 72 myself for quite a while.
It’s another tool to add to the “financial toolbox” that is helpful to keep around! 
hank’s last blog post..What do you have in your wallet - cash, credit, or none of the above?
Comment by Mark from TheLocoMono on 21 March 2008:
What are some other tools to keep handy in the “financial toolbox”? In a way that’s appropriate because I can see Norm of This Old House rummaging through his financial toolbox to find the Ruler of 72. What would a compass be?