How to calculate compound interest The Rule of 72 is an easy way to explain compound interest. The Rule of 72 pulls all three components of the formula together. Be mindful, too, that the Rule of 72 is an estimate, not an absolute. The rule estimates the number of years it takes for an investment’s value to double at a specific interest rate, or rate of return. To perform this calculation, divide 72 by the interest rate; that amount will be the number of years it will take the investment to double.

For example, at a rate of 8 percent, an investment’s value will double in nine years. Seventy-two divided by eight equals nine. This measurement is also used to estimate the impact of inflation. At 4 percent inflation, the price of a gallon of milk will double in price in 18 years. Seventy-two divided by four equals eighteen.

The Rule of 72 is a simple financial planning tool to estimate how much principal you can accumulate at various rates of return. Time and rate make a big difference when measuring the increase in principal. For example, $1,000 grows to $4,000 at four percent, while the same $1,000 grows to $64,000 using 12 percent over the same length of time. What would you rather have—$4,000 or $64,000? Compounding at four percent, the money doubles every eighteen years. But compounding at 12 percent, it doubles
every six years.

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