Understanding the Rule of 72: A Simple Tool for Estimating Investment Growth

Albert Einstein said: “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”

When it comes to personal finance and investing, complex math often intimidates people. The good news is you do not always need a calculator or spreadsheet to make quick, useful estimates about your money. One of the easiest tools you can use is the Rule of 72—a simple formula that helps you estimate how long it will take for your investment to double based on a fixed annual rate of return.

What is the Rule of 72?

The Rule of 72 works like this: take the number 72 and divide it by your annual interest rate (expressed as a whole number, not a decimal). The result is the approximate number of years it will take for your investment to double.

Why it works?

The Rule of 72 is based on the mathematics of compound interest—when your earnings generate their own earnings over time. It is an approximation, but for interest rates between 5% and 12%, it is surprisingly accurate and quick to apply.

Practical Uses

• Investing: Quickly estimate how long your retirement savings might take to double at a given return rate.
• Debt: Understand how quickly credit card balances can grow if you carry high interest rates.
• Goal Planning: Compare investment options to see which gets you to your target faster.

Limitations to Keep in Mind

While the Rule of 72 is handy, it is not exact. It works best for moderate ierest rates and assumes a consistent rate of return—something real-world investments rarely guarantee. For extremely high or exceptionally low rates, the estimate becomes less accurate.

The Bottom Line

The Rule of 72 is a fast, easy way to understand the power of compound interest—whether it is working for you in investments or against you in high-interest debt. By keeping this mental shortcut in your financial toolkit, you can make smarter, quicker decisions about your money without needing to crunch the numbers every time.

Do I make a larger Downpayment?

The Rule of 72 can be a valuable tool in determining how much of a downpayment you should make. Sometimes making a large downpayment is not the right financial strategy. What is the rate of return on your investments? Do your investments earn more than the cost of the mortgage? What does this look like after 10-Years? Using the Rule of 72 can help you make the right decision when allocating your assets.

If you would like to learn more about how the Rule of 72 can help you make more effective financial decisions, please contact your FDM Mortgage Professional today.