The Rule of 72

If you’re operating on the old adage that your savings will double every 7 years, you’re missing some critical information. Compound interest isn’t quite that easy. But it’s not that difficult either if you use the “Rule of 72.”

The Rule of 72 is a simple formula you can use to determine how long an investment will take to double based on a fixed annual rate of return. Let’s say you invest $5,000 at 8 percent interest. Divide 72 by the interest rate (8). The result is the number of years it will take your investment to double. In this case, it will take 9 years. Your $5,000 will be worth around $10,000 in 9 years, and about $20,000 in 18 years—and in 27 years about $40,000.

If that same $5,000 is invested at 4 percent interest, then the equation looks like this: 72 ÷ 4 = 18. It will take 18 years for your initial investment to double to $10,000, 36 years to reach $20,000, and 54 years for it to reach $40,000.