Rule of 72: What it is & How to Calculate

Investment returns are always open-ended. If all goes well, your investment will increase in value — and you’ll ultimately turn a profit after covering your tax liability. How long that will take depends on the asset in question, market volatility, and other factors. But that doesn’t mean investors can’t estimate certain outcomes. Some use the rule of 72 to predict when an investment’s value will double.

The formula has been around for a while, and it has its flaws, but it could give you a rough idea of what to expect. Here’s how the rule of 72 works so you can estimate the number of years your investment may need to grow two-fold.

What is the rule of 72? 

The rule of 72 is a basic formula that’s used to predict how many years it will take for an investment to double in value. You simply divide 72 by your expected rate of return. A variation of the rule can also be used to ballpark how many years it will take the dollar to lose half its value. With this formula, you take 70 and divide it by the current rate of inflation. Assuming a 6.5% inflation rate, it could take a little over 10 years for the dollar to be worth half its current value. 

The rule of 72 sounds easy enough, but there are some moving parts to consider. Using the most accurate estimated rate of return is a biggie. Depending on the number, it might make more sense to use a variation of the rule of 72 — like the rule of 71 or rule of 73.

How the rule of 72 works

Your expected return on investment (ROI) is the most important part of the equation. Some financial experts argue that the rule of 72 is accurate for investment earnings that are below 20%. Others say that 6% to 10% is the sweet spot, with 8% yielding the most accurate result. One variation is to adjust the rule up or down for every 3 points the ROI drifts from 8%. So if the ROI is 5%, for example, you’d use the rule of 71. An 11% ROI would use the rule of 73.

In reality, the rule of 72 provides a best guess of what your investment portfolio might look like down the line. It’s important to remember that market conditions are always changing. Per the golden rule of investing, past performance doesn’t necessarily guarantee future results. That’s just another way of saying that the rule of 72 is merely an estimate.

Rule of 72 formula

The rule of 72 shakes out like this:

• 72 {divided by} your expected return on investment

It focuses on how many years it will take for your investment to double. That’s why getting an early start can be such a powerful wealth-grower. Even if you’re beginning the investment journey a little later, making regular contributions to your investment accounts can help bolster your ROI over the long run. That's because it can potentially put compound returns to work for you. This allows you to earn interest on interest. 

Try our compound interest calculator to see for yourself!

Meanwhile, cashing out your investments can work against you. Your investment account balances might indeed grow over time — but if you’ve been depleting funds along the way, that amount may not be as robust as you’d like. With that said, the rule of 72 can apply to:

• Investment accounts like a 401(k) or IRA

• Brokerage accounts

• Long-term bonds

• Interest-earning savings accounts

Rule of 72 example

Now that you’ve got a handle on how the rule of 72 works, let’s run some numbers with different types of investments.

• The stock market: According to J.P. Morgan data, the average annualized return on the S&P 500 from 1950 to 2022 was a little more than 11%. In this case, what you’ve invested could be worth twice as much in six and a half years. The rule of 73 increases that number by only a small amount.

• Long-term bonds: The yield on a 10-year treasury note is currently 3.40%.  If you buy in today, the rule of 72 says it will take a little over 21 years for your investment to double in value. The rule of 71 shortens that window, but not by much.

• High-yield savings accounts: Let’s pretend you’ve got money parked in a high-yield savings account earning 3.30%. According to the rule of 72, your balance could double in a little over two decades. 

How to calculate the rule of 72

Step 1: Estimate your rate of return

It’s worth repeating that investment returns are never a sure thing. High-risk investments could swing either way, rendering significant gains or big losses. That’s why diversification is so important. The idea is to include a mix of investments in your portfolio, from riskier assets to safer bets. Investing in a wide variety of sectors and industries from different geographic locations can also help mitigate risk.

Individual stocks are considered risky investments, but some exchange traded funds (ETFs) offer diversified portfolios with exposure to a wide range of stocks.  Others provide access to baskets of investment including mixtures of stocks, bonds, and other assets.  You can start investing in a diversified ETF portfolio with Acorns Invest with as little as $5.

The rule of 72 relies on your estimated investment return. Historically, the average annual return of the stock market at large has been about 10%. Bonds have come in at around 5.5% for the last seven decades, according to J.P. Morgan. 

Step 2: Take 72 and divide it by your expected ROI

Once you feel comfortable with your estimated ROI, you’ll want to divide 72 by that number. Again, you might choose to go up to 73 or down to 71 if your ROI diverges from 8% by 3 points in either direction.

Step 3: Consider the bigger picture

The rule of 72 is meant to take some of the guesswork out of financial planning. An accurate timetable isn’t guaranteed, but it could bring you close. Again, you may decide to tweak the formula to better fit your needs. 

It’s important to note that taxes can eat into your overall earnings. If you sell an investment for more than you paid for it, that’s considered a capital gain — and that money is taxable. The amount you owe will depend on your income, tax-filing status, and how long you held the asset. Investment fees can also diminish your net returns. Your investment may indeed double, but you’ll want to factor these costs into the equation when running the calculations.

The rule of 72 is one of many guidelines folks use to manage their financial health. The 50/30/20 rule, for example, suggests allocating your take-home pay so that it accounts for fixed expenses, flexible spending, and financial goals. The 4% rule applies to retirement planning and recommends how much a retiree should withdraw annually so that they don’t outlive their nest egg. 

Ultimately, every person is different and has their own unique financial reality. When it comes to investing, your long-term goals, risk tolerance, and age will determine which investment strategies are right for you.