The Rule of 72

The Rule of 72 is a handy formula to know. You can use it to answer either of two questions:

1. At a given interest rate, how long will it take money to double?
2. For a given time period, what interest rate is needed for money to double? 

To answer question 1, divide 72 by the interest rate. For example, you invest money at 18 percent today, divide 72 by 18 =4. It will takes 4 years for that money to double (the initial amount of money doesn't matter).

To answer question 2, divide 72 by the term. For example, you invest money for 4 years, divide 72 by 4 =18. You will need an 18 percent return to make it double.

The Rule of 72 can help you in a variety of ways. If your goal is to double your money in five years, use the Rule of 72 to tell you what yield is acceptable to you when buying notes. Try it using your own figures. Use the Rule for calculating how much you'll have at retirement, or for establishing your minimum note buying yields.