What is the Rule of 72?

The "Rule of 72" is an easy-to-calculate equation used to estimate how long it takes for an investment to double based on the annual rate of return.

It's simple, so let me give you an example. Let's say you invest $1,000 in the a Certificate of Deposit (CD) at the bank that pays 5% interest annually. Divide 72 by 5 and you'll get 14.4. That means in 14.4 years your investment will have doubled, or be worth $2,000. If an investment makes 7% interest annually, your money will double in just over 10 years (72 divided by 7 = 10.3). If you make 10% on an investment, it will double in about 7 years.

As always in investing, something to keep in mind when you're thinking about the Rule of 72 is compounding interest. Again let's look at a $1,000 investment making 10%, which is average historic annual return of the S&P 500. (72 divided by 10 = 7) So, in 7 years your investment will be worth $2,000. In 7 more years, it will have double again, so it will now be $4,000. In another 7 years, that $4,000 will have grown to $8,000, then $16,000 another another 7 years, and so on.

Again, this is why investing from a young age and keeping your money invested for the long term is the strategy most often preached by the best money managers in the business!