The Rule of 72 Explained: How To Double Your Money Faster
The Rule of 72 is a formula to predict how long it will take to double your investment portfolio, and demonstrates the power of compound growth. While it’s a useful guide for calculating how long it will take your money to double give a certain annual rate of return, it’s a general guideline — not a promise.
The key to growing your wealth is to consistently save and contribute to your investment accounts.
Must Read
How the Rule Works
Divide 72 by your expected rate of return to estimate how many years it will take for your money to double. For instance, if the expected rate of return is 6%, the calculation would look like this:
72 / 6 = 12
Therefore, it would take 12 years to double your portfolio if you average a 6% return per year. However, you may be able to estimate an even higher rate of return depending on your investment vehicle. If you average an 8% return per year, you will double your money faster:
72 / 8 = 9
Jumping from a 6% annualized return to an 8% annualized return allows you to double your money three years faster.
Why Compounding Is So Powerful
Compound interest is the interest you earn on interest — and though compounding can start slowly, it becomes more powerful as your portfolio grows.
Say $1,000 grows at an annual rate of 7%. After one year, you'd have $1,070. Then, the 7% interest grows on $1,070. After the second year, you'd have $1,145.
You can reinvest dividends and interest payments so that they compound.
Extra Money: See how you can get up to $1,000 in stock when you fund a new active SoFi invest account
Cutting Lost Time: Fees and Taxes
Despite compound growth, fees can eat away at your portfolio. Mutual funds and exchange-traded funds (ETFs) come with expense ratios, or the cost of someone managing your account. While many ETFs that follow market benchmarks like the S&P 500 and have expense ratios below 0.10%, some actively managed funds have expense ratios of 1% or even higher. That can significantly hurt your returns.
If your ETF produces an annualized 8% return and has a 1% expense ratio, you only end up with a 7% return. Instead of doubling your money in nine years, the lower 7% return results in you doubling your money in 10 years.
Taxes can also weigh on returns if your fund distributes cash that is treated as ordinary income. Because of this, you may want to pick an index fund with a low expense ratio and cash distributions that are not treated as ordinary income.
Save Smarter: Take control of your money with the Rocket Money budgeting app, one of Money's favorites
Putting the Rule Into Action
You can use the 72 rule to gauge how long it will take for your portfolio to double using a fund’s historical returns to predict future annualized returns — though keep in mind that past returns don’t guarantee future ones. Having an estimate for how long it will take to double your money can help with your retirement goal planning.