The Magical Rule of 72, and why you should know it.

What is the Rule of 72? It sounds kind of exotic, like it’s some secret business code.

Here’s what the rule of 72 is in a nutshell. Before I give you the definition, you can use the rule of 72 to calculate many things, such as investments, return on investments, how many years to do something, etc. Now the definition.

The rule of 72 is a simple calculation used to find how long it will take to double your money. The way it works is you take the number 72 and divide it by the interest rate. Here’s an example.

Say you have $2,500 and you want to double that amount into $5,000 in five years, what interest rate of return would you need to do that? The calculation would be 72 divided by 5 = 14.4%. This means that you would need a steady interest rate of 14.4% to increase your $2,500 to $5,000 in five years.

The same would be true if you knew the interest rate, but not how long it would take to double your money. Then the calculation would be 72 divided by 14.4% would equal five years.

If you wanted to know how long it was going to take to pay your mortgage in half. You would then take the magic 72 and divide it by your current interest rate. For example, if your interest rate were 4%, you would take 72 divided by 4 to get 18 years. If your mortgage loan were $400,000 it would take 18 years to pay your balance down to $200,000.

72 is a pretty magical number. If you want to invest in a business and you want to double your money in 10 years, the calculation would be 72 divided by 10 which would equal 7.2%.

You would need a return of 7.2% on average to double your money in that time period.

This calculation is a simple one to do in your head, or on a piece of paper and is a general average that doesn’t include investment or loan costs, or account for inflation. Here are a couple of final examples you can use in your everyday life or business life.

The Magical 72 divided by the number of years equals the interest rate needed to double your money.

72/# of Years = Interest Rate %

The Magical 72 divided by the interest rate equals the number of years it will take to double your money.

72/Interest Rate % = # of Years

There’s a very detail explanation on Wikipedia, but suffice it to say that it’s a good little calculation to have in your back pocket. I've included a simple graph and a chart that shows how many years it would take to double your money again and again at different interest rates. Take a look.