The Rule of 72 for compound interest
Within the financial community, the Rule of 72 is used
as a quick and accurate tool to predict how fast your money will
grow, how much interest you will need to earn to reach your goal
and how inflation can affect your savings.
Here's how it works:
- To find out how long it will take your money to double at
various interest rates, take the number 72 and divide it by the
interest rate. This will give you the number of years it will
take your money to double. For example:
If you invested in a product with an 8% interest rate, it
would take 9 years for any amount of money you put in that
account to double:
72 divided by 8 = 9
- To find out the interest rate you would need to double your
income within a certain period of time, take the number 72 and
divide it by the number of years you want to invest.
This will give you the interest rate you would need to double
your money in that amount of time. For example:
If you wanted to double your income in 15 years, you would
need to find a product which had an interest rate of 4.8%:
72 divided by 15 = 4.8
- For those of you that still may favor putting your savings
under your mattress at home, the rule of 72 can also show you
that at an inflation rate of approximately 5% per year, your
money would be worth only half the original value in 14.4 years:
72 divided by 5 = 14.4
This formula assumes that the interest (or inflation) rate
remains the same throughout the period.
But, even with rate fluctuations, using average rates the
Rule of 72 can give you relatively accurate information and
be a helpful tool in your financial planning.
from Texas A&M University System News, January, 1993
(C) copyright Texas A&M University System;
reproduced here for a private educational purpose
Why does this rule work?