FCS 3400
The "Rule of 72":
Estimating Time to Double Savings
How long does it take to double your money when saving (investing)? Or
how long will it take before you end up paying back twice as much as
you borrowed?
- One way would be to carry a table of computations with you which
would tell you the number of years it would take to double your money
for each rate of interest (or percentage yield) you expect to receive.
However, that would be inconvenient.
- An easier way would be to learn the following simple concept called
the "Rule of 72." Just remember that a given deposit (investment) will
be doubled in 72 years if the interest rate (yield) is 1% per annum.
To find out how long it would take to double your money at 2%, just
divide the 72 years by 2 (the interest rate). You will find that it
would take 36 years to double your money with a 2% interest rate on
your investment. Likewise, if the interest rate is 10%, divide the 72
years by 10 (the interest rate) to arrive at 7.2 years to double your
investment. This simple "Rule of 72" wherein your divide 72 by the
interest rate to determine how many years it will take to double your
savings is easy to remember without having to refer to a table of interest
computations.
- In addition to determining how long it will take to double your
savings, the "Rule of 72" can also be used to figure out how long it
will take before you pay back twice as much as you borrowed at a given
interest rate. For example, if you borrowed $1,000 at an annual
interest rate of 18% and waited four years before paying off the entire
loan, you would pay back $2,000 ($1,000 in interest) - - just double
your original loan. In this example, you would just divide 72 years
by 18 to arrive at the 4 years which is how long it would take before
you pay back twice as much as your borrowed at an 18% annual loan
interest rate. This simple rule of thumb can be used to figure out
how long it would take to pay back twice as much as you borrowed at
any given loan interest rate.
- The following chart need not be memorized; it is just a handy
reference to see if you are properly using the "Rule of 72" in
determining how many years it takes to double your money; or how many
years it takes before you end up repaying twice as much as you borrowed:
Percentage Rate Interest Years Before Doubling Saving
or Doubling Amount of Loan Paid Back
| 30% |
20% |
18% |
15% |
12% |
10% |
9% |
8% |
7% |
6% |
5% |
4% |
2% |
1% |
| 2.4 |
3.6 |
4 |
4.8 |
6 |
7.2 |
8 |
9 |
10.3 |
12 |
14.4 |
18 |
36 |
72 |