The Rule of 72 is a quick and easy way to figure out how long something will take to double in value at a given interest rate.
The calculation is simple: If you have a percentage growth rate (e.g., investment returns, interest rate or inflation), divide 72 by the expected rate of growth to work out how long it will take for it to double.
Let’s look at some examples:
If the price of bread is R12 in 2019 and inflation is 6%, then we can use the Rule of 72 to estimate how long it will take for the cost of bread to double. Here’s how:
- 72 / 6 = 12 years
In other words, with inflation of 6%, a loaf of bread will cost R24 in the year 2031.
Here’s another example: If you have an investment of R20,000 and you expect the returns of the investment to be 12% per year, how long will it take for your investment to double?
- 72 / 12 = 6 years
So in around six years, the value of the investment would have doubled.
Some caveats around the rule:
- The rule is only an approximation, and although it’s pretty accurate, it doesn’t give you an exact answer (but it’s usually pretty close and much quicker than running a full calculation).
- The rule starts losing accuracy at high-interest rates, but works pretty well for interest rates between 4% – 15% (which is the range you will usually encounter).
Our friend Stealthy Wealth knows his way around maths. Luckily for us he also speaks human, which is why we asked him to explain the most important maths we need to know to be good at money. This is not your average maths class. Tune in once a month and turn into a money mathemagician.