Rule of 72 - Compounding Interest

Professor Hootsworth

Oct 24, 2024

The Rule of 72 is particularly useful when applied to compound interest because it estimates the time it will take for an investment to double based on the interest that compounds over time. Compound interest refers to the process where the interest you earn is added back to the principal, and from that point on, you earn interest on both the original principal and the accumulated interest.

How it Works with Compounding Interest:

When your investment grows through compound interest, you are continually earning interest on an increasing balance. The Rule of 72 offers a rough estimate of how long this process will take to double your investment based on the annual percentage rate (APR).

Example with Compounding:

If you invest $10,000 at an annual return rate of 6% with compounding interest:

According to the Rule of 72, the time for the investment to double is approximately:

After 12 years, your $10,000 would have grown to approximately $20,000.

Here’s a table illustrating how your investment of $25,000 would grow over time with 10% annual returns:

Year	Investment Value ($)
0	$25,000
7.2	$50,000
14.4	$100,000
21.6	$200,000
28.8	$400,000
36	$800,000

NOTE: That's a one time investment of $25,000 at the beginning and not $25,000 invested every year.

Key Points to Remember:

Compounding frequency: The Rule of 72 assumes annual compounding, but the actual growth can vary slightly if interest is compounded more frequently (monthly, quarterly, etc.).

Accuracy: The Rule of 72 is most accurate for interest rates between 6% and 10%. For very high or low rates, it becomes less precise but still provides a close estimate.

This rule helps investors quickly understand the power of compounding and the time horizon they can expect for their money to double.

PRODUCT

COMPANY

OUR AFFILIATES

MY ACCOUNT

Trading is risky and many will lose money in connection with trading activities. All content on this site is not intended to, and should not be, construed as financial advice. Decisions to buy, sell, hold or trade in securities, commodities and other markets involve risk and are best made based on the advice of qualified financial professionals. Past performance does not guarantee future results.

Hypothetical or Simulated performance results have certain limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not been executed, the results may have under-or-over compensated for the impact, if any, of certain market factors, including, but not limited to, lack of liquidity. Simulated trading programs in general are designed with the benefit of hindsight, and are based on historical information. No representation is being made that any account will or is likely to achieve profit or losses similar to those shown.

Testimonials appearing on this website may not be representative of other clients or customers and is not a guarantee of future performance or success.

As a provider of technical analysis tools for charting platforms, we do not have access to the personal trading accounts or brokerage statements of our customers. As a result, we have no reason to believe our customers perform better or worse than traders as a whole based on any content or tool we provide.

Charts used on this site are by NinjaTrader in which the majority of our tools are built on. NinjaTrader® is a registered trademark of NinjaTrader, Inc. www.NinjaTrader.com. NinjaTrader® has no affiliation with the owner, developer, or provider of the Services described herein.

This does not represent our full Disclaimer. Please read our full disclaimer