What is it and how to calculate it
Select’s editorial team works independently to review financial products and write articles that we think our readers will find useful. We earn commission from affiliate partners on many offers, but not all offers on Select are from affiliate partners.
When we put our money in the market, or even before we do, one of the biggest questions we ask ourselves is: how long will it take for this investment to really grow?
Fortunately, there is a mathematical shortcut to help you estimate the future value of an investment. The rule of 72 is a quick way to understand approximately the number of years needed to double your invested money.
Using your rate of return, the rule of 72 is a simplified formula that measures the effect of compound interest on your investment dollars. As a reminder, compound interest is calculated on your principal amount, plus your accrued interest. It basically pays interest on top of the interest and is a huge advantage of investing in the market since your earned interest is automatically reinvested making you even more profitable.
Subscribe to the Select newsletter!
Our top picks delivered to your inbox. Shopping recommendations that help you improve your life, delivered weekly. Register here.
How to Calculate the Rule of 72
To use the rule of 72 formula, simply divide 72 by the expected annual rate of return. Note that the formula assumes the same rate throughout the life of the investment.
For example, let’s say you invest $50,000 in a mutual fund with a hypothetical average rate of return of 6%. Using the rule of 72 formula, your calculation will look like this: 72/6 = 12. This tells you that at an annual rate of return of 6%, you can expect your investment to double in value – to be worth $100,000 – in about 12 years.
When calculating the rule of 72 for any investment, note that the formula is an estimation tool and the years are approximate. The Rule of 72 works primarily with common rates of return between 5% and 12%, with an 8% return as a benchmark for accuracy. Lower or higher rates outside of this range can be better predicted using an adjusted rule of 71, 73, or 74, depending on how much below or above the range they fall. You typically add one to 72 for every three percentage point increase. So a 15% rate of return would mean you are using the rule of 73.
Keep in mind that a mutual fund or an index fund are smart investment options, especially for beginners, as they provide instant diversification by pooling the money of many people to invest in a set of companies. They also offer somewhat predictable long-term returns. For example, S&P 500 index funds have generated an average annualized return of around 11% since 1950, even with significant up and down swings in some years.
Robo-advisors like Wealthfront, Betterment, and SoFi will build you a portfolio of index funds (usually in the form of ETFs) based on your risk tolerance, time horizon, and investment goals. These are good platforms to use when you start investing, as the robo-advisors automatically rebalance your portfolio for you as you get closer to your investment goals. If you want more control over your investments, consider a brokerage that doesn’t charge commission fees, like Charles Schwab or Fidelity.
Minimum deposit and balance
Deposit and minimum balance requirements may vary depending on the investment vehicle selected. No minimum to open a Fidelity Go account, but a minimum balance of $10 for the robo-advisor to start investing. Minimum balance of $25,000 for personalized planning and advice from Fidelity
Fees may vary depending on the investment vehicle selected. No commission fees for trades in stocks, ETFs, options and some mutual funds; zero transaction fees for over 3,400 mutual funds; $0.65 per options contract. Fidelity Go is free for balances under $10,000 (afterwards, $3 per month for balances between $10,000 and $49,999; 0.35% for balances over $50,000). Fidelity’s personalized planning and advice has a 0.50% advisory fee.
Robo-advisor: Fidelity Go® and Fidelity® Personalized planning and advice IRA: Fidelity Investments Traditional IRAs, Roths and Rollovers Brokerage and negotiation: Fidelity investment trading Other: Fidelity Investments 529 Education savings; Loyalty HSA®
Stocks, bonds, ETFs, mutual funds, CDs, options and fractional shares
Comprehensive tools and industry-leading in-depth research from over 20 independent vendors
On Betterment’s secure site
Minimum deposit and balance
Deposit and minimum balance requirements may vary depending on the investment vehicle selected. For Betterment Digital Investing, minimum balance of 0 USD; Premium investment requires a minimum balance of $100,000
Fees may vary depending on the investment vehicle selected. For Betterment Digital Investing, 0.25% of your fund balance as an annual account fee; Premium Investing has an annual fee of 0.40%
Up to one year of free management service with qualifying deposit within 45 days of signup. Valid only for new individual investment accounts with Betterment LLC
Stocks, bonds, ETFs and cash
Betterment RetireGuide™ helps users plan for retirement
The rule of 72 and inflation
The rule of 72 can also help you see how long it would take to the effect of inflation to cut your money in half.
For example, let’s say you have $100,000 and you expect a hypothetical long-term inflation rate of 3%. Since inflation reduces your purchasing power over time, your $100,000, if not invested, would lose half of its value (i.e. it is worth 50,000 $) in 24 years. The math for this looks like: 72/3 = 24. If inflation goes from a rate of 3% to 6%, that same $100,000 would lose half its value even faster – in just 12 years (72 /6 = 12).
At the end of the line
The Rule of 72 is an easy way to quickly tell when your investments will double in value. It can also help you see how quickly or how far inflation will eventually halve the value of your money.
Check out Select’s in-depth coverage at personal finance, technology and tools, The well-being and more, and follow us on Facebook, instagram and Twitter to stay up to date.
Editorial note: Any opinions, analyses, criticisms or recommendations expressed in this article are those of Select’s editorial staff only and have not been reviewed, endorsed or otherwise endorsed by any third party.