The rule of 72 is one of those mathematical formulas that are great because it’s so simple, yet effective in showing you the dramatic effect of compound interest.
Simply, the rule of 72 says that the approximate amount of time (in years) that your money will double is 72 divided by the interest rate (in percentage).
For example, a quick calculation tells us that our money will double in 12 years if the interest rate is 6% (72 / 6 = 12) while the same gain could be had in 9 years if the interest rate increases to 8% (72 / 8 = 9). Here’s a graph with more examples.
2% means your money will double in 36 years while 12% means 6. It’s no wonder why people are always hungry for a higher yield!
The rule of 72 is a nifty way of not just showing your friends that you are quick with math but also a convenient mechanism to illustrate the power of having a higher rate of return.