What is The Rule of 72?

Welcome to the Investors Trading Academy talking glossary of financial terms and events.
Our word of the day is “Rule of 72”
The rule of 72 is a shortcut to estimate the number of years required to double your money at a given annual rate of return. The rule states that you divide the rate, expressed as a percentage, into 72.
The rule of 72 is reasonably accurate for interest rates between 6% and 10%. When dealing with rates outside this range, the rule can be adjusted by adding or subtracting 1 from 72 for every 3 points the interest rate diverges from 8%. So for 11% annual compounding interest, the rule of 73 is more appropriate; for 14%, it would be the rule of 74; for 5%, the rule of 71.
By the way, the Rule of 72 applies to anything that grows, including population. Can you see why a population growth rate of 3% vs 2% could be a huge problem for planning? Instead of needing to double your capacity in 36 years, you only have 24. Twelve years were shaved off your schedule with one percentage point.

By Barry Norman, Investors Trading Academy – ITA