What annual rate of interest compounded annually is required to double an investment in 9 years?

Calculating compound interest is complicated. Luckily, there’s a simple shortcut that helps you estimate how a fixed interest rate will affect your savings: the Rule of 72.

The Basics

The Rule of 72 is a tool used to estimate how long it will take an investment to double at a given interest rate, assuming a fixed annual rate of interest. All you need to use the tool is an interest rate, which means you can make estimates for your current account rate or use this rule to know what rate you should look for if you want to double your money by a specific deadline.

To figure out how long it will take to double your money, take the fixed annual interest rate and divide that number into 72. Let’s say your interest rate is 8%. 72 ∕ 8 = 9, so it will take about 9 years to double your money. A 10% interest rate will double your investment in about 7 years (72 ∕ 10 = 7.2); an amount invested at a 12% interest rate will double in about 6 years (72 ∕ 12 = 6).

Using the Rule of 72, you can easily determine how long it will take to double your money.

To figure out what interest rate to look for, use the same basic formula, but run it backward: divide 72 by the number of years. So if you want to double your money in about 6 years, look for an interest rate of 12%.

The basic algebraic formula looks like this, where Y is the number of years and r is the interest rate:

Y = 72 ∕ r and r = 72 ∕ Y

This rule works for interest rates from about 4% up to about 20%; after that, the error becomes significant and more straightforward math is required.

Illustration: Chelsea Miller

Why 72?

Here, we merely scrape the surface of that “more straightforward math.” To really dive deep into why the rule works, check out this article.

The Rule of 72 is itself an estimation. It uses a concept called natural logarithms to estimate compounding periods. In mathematics, the natural logarithm is the amount of time needed to reach a particular level of growth using continuous compounding.

For math enthusiasts out there: it is easiest to see how this works through continuously compounded interest. (The Rule of 72 addresses annually compounded interest, but we’ll get there in a minute.)

When dealing with continuously compounding interest, you can work out the exact time it takes an investment to double by using the time value of money formula (TVM) and simplifying the equation until eventually, you are left with something like this:

ln(2)= rY

The natural log (ln) of 2 is about 0.693. Solve for interest rate (r) or number of years (Y), and then multiply by 100 to express as a percentage or year, respectively.

Click here to read how this tool works, and for disclaimers.

Click here to read how this tool works, and for disclaimers.

Wait...

If our new formula is based on the number 69.3 (0.693 × 100), that begs the question: Why isn’t it called the Rule of 69.3?

First, that just doesn’t sound quite as good as “The Rule of 72.” Second, there are two points to remember:

1. The “Rule of 69.3” is not an estimation. It is the actual amount of time that it will take money to double, and works for any range of interest rates.

2. The Rule of 69.3 works for continuously compounded interest. The Rule of 72 works for a fixed annual rate of interest.

The math equation for fixed annual interest is slightly more complex, and simplifying it leaves us with approximately 72.7.

Normally, we would round up to 73. However, 72 is much easier to work with, as it is readily divisible by 2, 3, 4, 6, 8, 9, and 12. As we are already estimating, convenience wins out, and we are left with the Rule of 72.

History

The Rule of 72 was first introduced in the late fifteenth century by the Franciscan friar and Italian mathematician Luca Pacioli. A contemporary of Leonardo da Vinci, Pacioli is considered by many to be the father of accounting. The Rule of 72 was introduced in his book Summa de arithmetica, geometria, proportioni et proportionalita, published in 1494 for use as a textbook for schools in what is now northern Italy.

Calculator Use

Use the Rule of 72 to estimate how long it will take to double an investment at a given interest rate. Divide 72 by the interest rate to see how long it will take to double your money on an investment.

Alternatively you can calculate what interest rate you need to double your investment within a certain time period. For example if you wanted to double an investment in 5 years, divide 72 by 5 to learn that you'll need to earn 14.4% interest annually on your investment for 5 years: 14.4 × 5 = 72.

The Rule of 72 is a simplified version of the more involved compound interest calculation. It is a useful rule of thumb for estimating the doubling of an investment. This calculator provides both the Rule of 72 estimate as well as the precise answer resulting from the formal compound interest calculation.

Rule of 72 Formula

The Rule of 72 is a simple way to estimate a compound interest calculation for doubling an investment. The formula is interest rate multiplied by the number of time periods = 72:

R * t = 72

where

• R = interest rate per period as a percentage
• t = number of periods

Commonly, periods are years so R is the interest rate per year and t is the number of years. You can calculate the number of years to double your investment at some known interest rate by solving for t: t = 72 ÷ R. You can also calculate the interest rate required to double your money within a known time frame by solving for R: R = 72 ÷ t.

Derivation of the Rule of 72 Formula

The basic compound interest formula is:

A = P(1 + r)t,

where A is the accrued amount, P is the principal investment, r is the interest rate per period in decimal form, and t is the number of periods. If we change this formula to show that the accrued amount is twice the principal investment, P, then we have A = 2P. Rewriting the formula:

2P = P(1 + r)t , and dividing by P on both sides gives us

(1 + r)t = 2

We can solve this equation for t by taking the natural log, ln(), of both sides,

\( t \times ln(1+r)=ln(2) \)

and isolating t on the left:

\( t = \dfrac{ln(2)}{ln(1+r)} \)

We can rewrite this to an equivalent form:

\( t = \dfrac{ln(2)}{r}\times\dfrac{r}{ln(1+r)} \)

Solving ln(2) = 0.69 rounded to 2 decimal places and solving the second term for 8% (r=0.08):*

\( t = \dfrac{0.69}{r}\times\dfrac{0.08}{ln(1.08)}=\dfrac{0.69}{r}(1.0395) \)

Solving this equation for r times t:

\( rt=0.69\times1.0395\approx0.72 \)

Finally, multiply both sides by 100 to put the decimal rate r into the percentage rate R:

R*t = 72

*8% is used as a common average and makes this formula most accurate for interest rates from 6% to 10%.

Example Calculations in Years

If you invest a sum of money at 6% interest per year, how long will it take you to double your investment?

t=72/R = 72/6 = 12 years

What interest rate do you need to double your money in 10 years?

R = 72/t = 72/10 = 7.2%

Example Calculation in Months

If you invest a sum of money at 0.5% interest per month, how long will it take you to double your investment?

t=72/R = 72/0.5 = 144 months (since R is a monthly rate the answer is in months rather than years)

144 months = 144 months / 12 months per years = 12 years

References

Vaaler, Leslie Jane Federer; Daniel, James W. Mathematical Interest Theory (Second Edition), Washington DC: The Mathematical Association of America, 2009, page 75.

Weisstein, Eric W. "Rule of 72." From MathWorld--A Wolfram Web Resource, Rule of 72.

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