The Rule of 72 | Primerica (2024)

FAQs

What is the Rule of 72 answer? ›

Just take the number 72 and divide it by the interest rate you hope to earn. That number gives you the approximate number of years it will take for your investment to double.

The Rule of 72 is a calculation that estimates the number of years it takes to double your money at a specified rate of return. If, for example, your account earns 4 percent, divide 72 by 4 to get the number of years it will take for your money to double. In this case, 18 years.

If you need to double your financial investment in 10 years, a savings account with a 5% interest rate, for instance, wouldn't help achieve your goals. You'd need something with a higher rate of return (at least 7.2%) to make that 10-year milestone happen.

Final answer:

It will take approximately 15.27 years to increase the $2,200 investment to $10,000 at an annual interest rate of 6.5%.

The Rule of 72 applies to compounded interest rates and is reasonably accurate for interest rates that fall in the range of 6% and 10%. The Rule of 72 can be applied to anything that increases exponentially, such as GDP or inflation; it can also indicate the long-term effect of annual fees on an investment's growth.

Do not subtract other amounts that may be withheld or automatically deducted, like health insurance or retirement contributions. Those will become part of your budget. The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings.

One of those tools is known as the Rule 72. For example, let's say you have saved $50,000 and your 401(k) holdings historically has a rate of return of 8%. 72 divided by 8 equals 9 years until your investment is estimated to double to $100,000.

Therefore, it will take about 6.76 years for an investment of $4,000 to grow to $9,000 at a 7% annual interest rate compounded monthly.

How much is $1000 worth at the end of 2 years if the interest rate of 6% is compounded daily? ›

Hence, if a two-year savings account containing $1,000 pays a 6% interest rate compounded daily, it will grow to $1,127.49 at the end of two years.

An intuitive understanding of continuous compounding can be developed with examples, like the textbook solution that showcases how an $8000 investment grows over time when compounded continuously at an 8% interest rate, yielding double the amount in approximately 8.66 years.

It would take 14.4 years to double your money. Applying the rule of 72, the number of years to double your money is 72 divided by the annual interest rate in percentage. In this question, the annual percentage rate is 5%, thus the number of years to double your money is: 72 / 5 = 14.4.

One can also use this to compute the returns a portfolio should generate to double money in a given time period. If you want to double it in five years, the portfolio should be invested such that it yields 72/5=14.4%.

Rule 72(t) allows for penalty-free withdrawals from Individual Retirement Accounts (IRAs) and other tax-advantaged retirement accounts like 401(k) and 403(b) plans. It is issued by the Internal Revenue Service (IRS).