Financial calculations are often very complicated. However, there is a popular "short cut" that is often used to estimate: (a) the number of years it will take for an investment to double at a given interest rate, or (b) the interest rate required for an investment to double in value over a given number of years. It is called the "Rule of 72," and works as follows.
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To estimate the number of years it will take for an investment to double in value, divide 72 by the annual interest rate. So if you start with an investment of $1,000 and you want to see how long it will take to reach $2,000 assuming an annual compound interest rate of six percent, divide 72 by 6 which yields 12. So it will take a! bout 12 years for an investment to double in value assuming an annual compound interest rate of six percent.
If we change the assumed interest rate to ten percent, then we would divide 72 by 10 which yields 7.2. So it will take a little over 7 years for an investment to double in value assuming an annual compound interest rate of ten percent.
To estimate the interest rate required for an investment to double in value, divide 72 by the number of years in the time horizon. So if you start with an investment of $5,000 and you want to see what interest rate you need to reach $10,000 in five years, divide 72 by 5 which yields 14.4. So you would need an annual compound interest rate of over 14% to double an investment in five years. If we increase the time horizon to 12 years, then we would divide 72 by 12 which yields 6. So you would need an annual compound interest rate of six percent to double an investment in 12 years.
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Always remember that these calculations are only rough estimates, so use them with care. But the Rule of 72 is a very handy tool for those times when you need to do some quick comparisons.
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