What is the ‘Rule of 72’ for investing?

The ‘Rule of 72’ is a really useful investment trick. Quite simply, it means that you can estimate the length of time it will take an investment (with a fixed annual interest rate) to double in value. You simply divide the target investment return into 72 to get your answer. Conversely, you can divide your desired investment term into 72 to work out the fixed annual interest rate required to double your investment.

For example, an annual rate of return of 6% p.a. would mean doubling your money in 12 years. If I want to double my money in 8 years, I will require a rate of return of 9% etc.

The bar chart below looks at 5 different annualised rates of return with the corresponding number of years it takes to double in value.

Some of the drawbacks of the ‘Rule of 72’ include:

• it only works for ‘lump sum’ investments and not regular savings.
• it doesn’t allow for taxation, contract charges or inflation, although adjustments can be made to take these into account.
• It relies on a constant fixed rate investment performance.

It should therefore be used as an estimator tool and not as an accurate predictor of investment performance.

In our next article we will explore whether Is it possible for an ordinary investor in Ireland to ‘double’ their money over 10 years?