Here is a piece of mental math worth more than most financial apps. To estimate how long it takes money to double at a given annual rate of compound growth, divide 72 by the rate. At 6 percent a year, money doubles in about 72 ÷ 6 = 12 years. At 8 percent, about nine years. At 3 percent, about 24.
Why 72?
The exact answer comes from logarithms, and for most realistic rates 72 gives a very close approximation. It also happens to divide evenly by many common rates (2, 3, 4, 6, 8, 9 and 12), which makes it easy to use in your head. The U.S. Securities and Exchange Commission’s investor education site, Investor.gov, uses it to explain compound interest.
Three ways to use it
Savings and investing. The rule shows why starting early matters so much. Money growing at 7 percent doubles roughly every ten years. A sum invested at 25 can double four times by 65; the same sum invested at 45 doubles only twice. That is the difference between 16 times your money and four times.
Debt. It works in reverse, too. A credit card balance at 24 percent interest that is left unpaid doubles in about three years. That single calculation is a strong argument for paying off high-interest debt before investing.
Inflation. Divide 72 by the inflation rate to see how fast prices double, or how quickly cash loses half its buying power. At 3 percent inflation, prices double in about 24 years. At 6 percent, in about 12.
Limits
The rule assumes a steady rate, compounded, with nothing added or withdrawn. Real investments go up and down, and fees and taxes reduce returns. Treat it as a quick estimate, not a promise. But as a way to feel the power of compounding, for you or against you, nothing beats it.
Sources: Compound Interest Calculator, Investor.gov (U.S. SEC); Rule of 72, Wikipedia; Credit cards, Consumer Financial Protection Bureau.
