The Rule of 72: How to Calculate When Your Money Will Double
Have you ever wondered how long it would take for your money to double? The Rule of 72 is a quick and easy way to figure this out without complicated maths. This simple financial formula helps not only beginner investors, but experienced investors too, to understand compound growth and make smarter investment decisions.
What is a Rate of Return?
Before we dive in, let's understand what "rate of return" means. The rate of return is simply how much your investment grows in value over a certain period, usually shown as a percentage per year.
For example:
If you invest £100 and it grows to £107 after one year, your rate of return is 7%.
Savings accounts give you a fixed rate of return (the interest rate).
Investments like shares or funds can have varying rates of return depending on how well they perform.
What is the Rule of 72?
The Rule of 72 is a simple calculation that helps you work out how long it takes for your money to double based on its rate of return.
Here's how it works: you divide the number 72 by your rate of return (shown as a percentage).
The formula is: 72 ÷ rate of return = years to double your money
The beauty of the rule of 72 is that it lets you do quite a complex calculation in your head quickly and get a reasonably accurate answer.
How to Use the Rule of 72
Let's look at some examples:
If your money is growing at 2% per year, it will take about 36 years to double (72 ÷ 2 = 36).
If your money is growing at 4% per year, it will take about 18 years to double (72 ÷ 4 = 18).
If your money is growing at 8% per year, it will take about 9 years to double (72 ÷ 8 = 9).
The higher the rate of return, the faster your money doubles!
Why This Matters for UK Savers and Investors
Savings Accounts and ISAs
Many UK savings accounts and Cash ISAs offer rates of return between 1% and 5%. Using the Rule of 72:
At 1% return: your money doubles in 72 years (72 ÷ 1 = 72).
At 5% return: your money doubles in 14.4 years (72 ÷ 5 = 14.4).
That's a big difference in wealth building potential!
Inflation
Inflation in the UK has been around 2-10% in recent years.
The Rule of 72 can tell you how quickly the cost of things doubles:
At 2% inflation: prices double in 36 years.
At 10% inflation: prices double in just 7.2 years.
This shows why inflation can be so harmful to your savings.
Investments in the FTSE and Stock Market
The UK stock market (measured by the FTSE All-Share index) has historically delivered average returns of around 5-8% per year over long periods, though this varies year-to-year.
Using the Rule of 72:
At 5% growth: your investment doubles in about 14.4 years.
At 8% growth: your investment doubles in about 9 years.
This shows why investing in shares over the long term can help grow your wealth, even though returns can go up and down in the short term. Many UK investors use Stocks and Shares ISAs to benefit from this growth potential, while protecting returns from tax.
The Power of Compounding
The Rule of 72 shows the amazing power of compounding. This is when you earn returns on your previous returns.
For example:
You invest £10,000 with an 8% annual return.
In 9 years, you'll have about £20,000 (doubled).
In another 9 years, you'll have about £40,000 (doubled again).
In another 9 years, you'll have about £80,000 (doubled yet again).
This is how small amounts can grow into large sums over time!
When to Use the Rule of 72
The Rule of 72 is perfect for:
Quickly comparing different investment options like pensions, ISAs and funds.
Understanding how inflation affects your money over time.
Planning how long you need to invest to reach your financial goals.
Seeing the benefits of getting a slightly higher investment return.
Evaluating whether to choose active or passive investment strategies.
Remember
The Rule of 72 is an estimate, not an exact calculation.
It works best for rates of return between 1% and 20%.
Time and rate of return are equally important for growing your money.
Starting early makes a huge difference!
Small Differences, Big Results
One of the most powerful lessons from the Rule of 72 is how seemingly small differences in your rate of return can lead to dramatically different outcomes over time.
Consider these examples:
At 4% return: your money doubles in 18 years.
At 6% return: your money doubles in 12 years.
At 8% return: your money doubles in 9 years.
Just by increasing your return from 4% to 8%, you cut the doubling time in half! This is why it can be worth looking beyond standard savings accounts for some of your money.
For example, moving from a 1% savings account to a 6% investment portfolio means your money doubles in 12 years instead of 72 years - that's 60 years faster!
This simple rule helps you visualise why even a 1-2% improvement in your returns is worth pursuing, especially when you're investing for many years.
Next time you're thinking about where to put your money, use the Rule of 72 to compare your options and see how fast your money might grow.