The Rule of 72 | Primerica (2024)

FAQs

The Rule of 72 | Primerica? ›

Do you know the Rule of 72? It's an easy way to calculate just how long it's going to take for your money to double. Just take the number 72 and divide it by the interest rate you hope to earn. That number gives you the approximate number of years it will take for your investment to double.

What Is the Rule of 72? The Rule of 72 is a simple way to determine how long an investment will take to double given a fixed annual rate of interest. Dividing 72 by the annual rate of return gives investors a rough estimate of how many years it will take for the initial investment to duplicate itself.

The accuracy of the rule of 72

The rule of 72 gives 72/9 = 8 years, which is close to the exact answer.” However, Stanford adds that the rule of 72 is only an approximation that is accurate in a range of interest rates between 6% and 10%. Outside that range, the error can vary as little as 2.4% to as much as 14%.

It's worth noting, the “rule of 72” definition isn't necessarily perfectly accurate because past market results do not predict future market behavior. However, it's a “back of the napkin” way to determine where your portfolio might potentially be in the years ahead.

The number 72 is a better approximation for annual interest compounding at typical rates. For continuous compounding ln (2), which is about 69.3%, will give accurate results for any rate. Daily compounding is close enough to continuous compounding for most purposes, so 69.3 or 70 should be used.

Final answer:

It will take approximately 15.27 years to increase the $2,200 investment to $10,000 at an annual interest rate of 6.5%.

One of those tools is known as the Rule 72. For example, let's say you have saved $50,000 and your 401(k) holdings historically has a rate of return of 8%. 72 divided by 8 equals 9 years until your investment is estimated to double to $100,000.

Dave Ramsey on X: "Top 5 Careers of Millionaires: 1. Engineer 2. Accountant (CPA) 3. Teacher 4.

The Rule of 72 is a calculation that estimates the number of years it takes to double your money at a specified rate of return. If, for example, your account earns 4 percent, divide 72 by 4 to get the number of years it will take for your money to double. In this case, 18 years.

What is better than the Rule of 72? ›

Choice of rule

Since daily compounding is close enough to continuous compounding, for most purposes 69, 69.3 or 70 are better than 72 for daily compounding. For lower annual rates than those above, 69.3 would also be more accurate than 72. For higher annual rates, 78 is more accurate.

The Rule of 72 applies to compounded interest rates and is reasonably accurate for interest rates that fall in the range of 6% and 10%. The Rule of 72 can be applied to anything that increases exponentially, such as GDP or inflation; it can also indicate the long-term effect of annual fees on an investment's growth.

Rule 72(t) allows for penalty-free withdrawals from Individual Retirement Accounts (IRAs) and other tax-advantaged retirement accounts like 401(k) and 403(b) plans. It is issued by the Internal Revenue Service (IRS).

Five years is too short a period to expect a doubling of your investment. To achieve this target, you would need to earn a yearly return of 15 per cent, which seems highly ambitious, even for an all-equity portfolio.

This principle recommends investing the result of subtracting your age from 100 in equities, with the remaining portion allocated to debt instruments. For example, a 35-year-old would allocate 65 per cent to equities and 35 per cent to debt based on this rule.

Summary. Learn about the 8-4-3 rule of compounding, where investments double within 8, 4, and 3 years, showcasing exponential growth. It emphasizes staying dedicated to investment plans, guarding against inflation, and adapting to market changes.

Applying the rule of 72, the number of years to double your money is 72 divided by the annual interest rate in percentage. In this question, the annual percentage rate is 5%, thus the number of years to double your money is: 72 / 5 = 14.4.

Your investments

With an annual 4% return, it would take 18 years (72/4) to approximately double. With a 6% return, it would take 12 years (72/6), while with an 8% return it would take 9 years (72/8).