Rule of 72

From Wikipedia, the free encyclopedia

In finance, the rule of 72, the rule of 70 and the rule of 69.3 are methods for estimating
an investment's doubling time. The rule NUMBER (e.g., 72) is divided by the interest
percentage PER period to obtain the approximate number of periods (usually years) required for
doubling. Although scientific calculators and spreadsheet programs have functions to find the
accurate doubling time, the rules are useful for mental calculations and when only a
basic calculator is available.[1]
These rules APPLY to exponential growth and are therefore used for compound interest as
opposed to simple interest calculations. They can also be used for decay to obtain a halving time.
The choice of number is mostly a matter of preference: 69 is MORE accurate for continuous
compounding, while 72 works well in common interest situations and is more easily divisible. There
are a number of variations to the rules that improve accuracy. For periodic compounding,
the exact doubling time for an INTEREST RATE ofr per period is

,
where T is the number of periods required. The formula above can be used for more than
calculating the doubling time. If one wants to know the tripling time, for EXAMPLE , simply
replace the constant 2 in the numerator with 3. As another example, if one wants to know the
number of periods it takes for the initial value to rise by 50%, replace the constant 2 with 1.5.
Contents
[hide]

1 Using the rule to estimate compounding periods

2 Choice of rule

3 History

4 Adjustments for higher accuracy

o

4.1 E-M rule

5 Derivation

5.1 Periodic compounding

5.2 Continuous compounding

6 See also

7 References

8 External links

Using the rule to estimate compounding periods[edit]

To estimate the number of periods required to double an original investment, divide the most
convenient "rule-quantity" by the expected growth rate, expressed as a percentage.

For instance, if you were to invest $100 with compounding interest at a rate of 9% per
annum, the rule of 72 gives 72/9 = 8 years required for the investment to be worth $200; an
exact calculation gives ln(2)/ln(1+.09) = 8.0432 years.

Similarly, to DETERMINE the time it takes for the value of money to halve at a given rate,
divide the rule quantity by that rate.

To determine the time for money's buying power to halve, financiers simply divide the rulequantity by the inflation rate. Thus at 3.5% inflation using the rule of 70, it should take
approximately 70/3.5 = 20 years for the value of a unit of CURRENCY to halve.

To estimate the impact of additional fees on financial policies (e.g., mutual fund fees and
expenses, loading and expense charges on variable universal life insuranceinvestment
portfolios), divide 72 by the fee. For example, if the Universal Life policy charges a 3% fee
over and above the COST of the underlying investment fund, then the total account value
will be cut to 1/2 in 72 / 3 = 24 years, and then to just 1/4 the value in 48 years, compared to
holding exactly the same investment outside the policy.

Choice of rule[edit]
The value 72 is a convenient choice of numerator, since it has many small divisors: 1, 2, 3, 4, 6,
8, 9, and 12. It provides a good approximation for annual compounding, and for compounding at
typical RATES (from 6% to 10%). The approximations are less accurate at higher INTEREST
RATES .
For continuous compounding, 69 gives accurate results for any rate. This is because ln(2) is
about 69.3%; see derivation below. Since daily compounding is CLOSE enough to continuous
compounding, for most purposes 69, 69.3 or 70 are better than 72 for daily compounding. For
lower annual rates than those above, 69.3 would also be more accurate than 72.
Rate

Actual Years

Rule of 72

Rule of 70

Rule of 69.3

72 adjusted

E-M rule

0.25%

277.605

288.000

280.000

277.200

277.667

277.547

0.5%

138.976

144.000

140.000

138.600

139.000

138.947

1%

69.661

72.000

70.000

69.300

69.667

69.648

2%

35.003

36.000

35.000

34.650

35.000

35.000

Rate

Actual Years

Rule of 72

Rule of 70

Rule of 69.3

72 adjusted

E-M rule

3%

23.450

24.000

23.333

23.100

23.444

23.452

4%

17.673

18.000

17.500

17.325

17.667

17.679

5%

14.207

14.400

14.000

13.860

14.200

14.215

6%

11.896

12.000

11.667

11.550

11.889

11.907

7%

10.245

10.286

10.000

9.900

10.238

10.259

8%

9.006

9.000

8.750

8.663

9.000

9.023

9%

8.043

8.000

7.778

7.700

8.037

8.062

10%

7.273

7.200

7.000

6.930

7.267

7.295

11%

6.642

6.545

6.364

6.300

6.636

6.667

12%

6.116

6.000

5.833

5.775

6.111

6.144

15%

4.959

4.800

4.667

4.620

4.956

4.995

18%

4.188

4.000

3.889

3.850

4.185

4.231

20%

3.802

3.600

3.500

3.465

3.800

3.850

25%

3.106

2.880

2.800

2.772

3.107

3.168

Rate

Actual Years

Rule of 72

Rule of 70

Rule of 69.3

72 adjusted

E-M rule

30%

2.642

2.400

2.333

2.310

2.644

2.718

40%

2.060

1.800

1.750

1.733

2.067

2.166

50%

1.710

1.440

1.400

1.386

1.720

1.848

60%

1.475

1.200

1.167

1.155

1.489

1.650

70%

1.306

1.029

1.000

0.990

1.324

1.523

History[edit]
An early reference to the rule is in the Summa de arithmetica (Venice, 1494. Fol. 181, n. 44)
of Luca Pacioli (14451514). He presents the rule in a discussion regarding the estimation of the
doubling TIME of an investment, but does not derive or explain the rule, and it is thus assumed
that the rule predates Pacioli by some time.

A voler sapere ogni quantita a tanto PER 100 l'anno, in quanti anni sa

Roughly translated:

In wanting to know of any capital, at a given yearly percentage, in how m

Adjustments for higher accuracy[edit]

For higher rates, a BIGGER numerator would be better (e.g., for 20%, using 76 to get 3.8
years would be only about 0.002 off, where using 72 to get 3.6 would be about 0.2 off). This is
because, as above, the rule of 72 is only an approximation that is accurate for INTEREST
RATES from 6% to 10%. Outside that range the error will vary from 2.4% to 14.0%. For every
three percentage points away from 8% the value 72 could be adjusted by 1.

or for the same result, but simpler:

E-M rule[edit]
The EckartMcHale second-order rule (the E-M rule) provides a multiplicative
correction for the rule of 69.3 that is very accurate for rates from 0% to 20%. The
rule of 69.3 is normally only accurate at the lowest end of INTEREST RATES , from
0% to about 5%. To compute the E-M approximation, simply multiply the rule of 69.3
result by 200/(200r) as follows:

.
For example, if the INTEREST RATE is 18%, the rule of 69.3 says t = 3.85
years. The E-M rule multiplies this by 200/(20018), giving a doubling time of
4.23 years, where the actual doubling time at this RATE is 4.19 years. (The EM rule thus GIVES a closer approximation than the rule of 72.)
Note that the numerator here is simply 69.3 times 200. As long as the
product STAYS constant, the factors can be modified arbitrarily. The E-M rule
could thus be written also as

or
in order to keep the product mostly unchanged. In these variants, the
multiplicative correction becomes 1 respectively for r=2 and r=8,
the VALUES for which the rule of 70 (respectively 72) is most precise.
Similarly, the third-order Pad approximant gives a more accurate answer
over an even larger range of r, but it has a slightly more complicated
formula:

Derivation[edit]
Periodic compounding[edit]
For periodic compounding, future value is given by:

where
is the present value, is the number of time periods,
and stands for the interest rate per time period.

The future value is double the present value when the following
condition is met:

This equation is easily solved for :

If r is SMALL , then ln(1 + r) approximately equals r (this is

the first term in the Taylor series). Together with the
approximation

, this GIVES :

which improves in accuracy as the compounding of

interest becomes continuous (see derivation below).
However, humans tend to prefer performing mental
calculations with percentages, so the formula is often
restated as follows:

In order to derive the more precise adjustments

presented ABOVE , it is noted that
more closely approximated by
the SECOND term in theTaylor

is
(using

series).
can then be FURTHER
simplified by Taylor approximations:

Replacing the "R" in R/200 on the third line

with 7.79 gives 72 on the numerator.
This SHOWS that the rule of 72 is most
precise for periodically composed interests
around 8%.
Alternatively, the E-M rule is obtained if the
second-order Taylor approximation is used
directly.

Continuous compounding[edit]
For continuous compounding, the derivation is
simpler and yields a MORE accurate rule:

Rule of 72
From Wikipedia, the free encyclopedia

In finance, the rule of 72, the rule of 70 and the rule of 69.3 are methods for estimating
an investment's doubling time. The rule NUMBER (e.g., 72) is divided by the interest
percentage PER period to obtain the approximate number of periods (usually years) required for
doubling. Although scientific calculators and spreadsheet programs have functions to find the
accurate doubling time, the rules are useful for mental calculations and when only a
basic calculator is available.[1]
These rules APPLY to exponential growth and are therefore used for compound interest as
opposed to simple interest calculations. They can also be used for decay to obtain a halving time.
The choice of number is mostly a matter of preference: 69 is MORE accurate for continuous
compounding, while 72 works well in common interest situations and is more easily divisible. There
are a number of variations to the rules that improve accuracy. For periodic compounding,
the exact doubling time for an INTEREST RATE ofr per period is

,
where T is the number of periods required. The formula above can be used for more than
calculating the doubling time. If one wants to know the tripling time, for EXAMPLE , simply
replace the constant 2 in the numerator with 3. As another example, if one wants to know the
number of periods it takes for the initial value to rise by 50%, replace the constant 2 with 1.5.
Contents
[hide]

1 Using the rule to estimate compounding periods

2 Choice of rule

3 History

4 Adjustments for higher accuracy

o

4.1 E-M rule

5 Derivation
o

5.1 Periodic compounding

5.2 Continuous compounding

6 See also

7 References

8 External links

Using the rule to estimate compounding periods[edit]

To estimate the number of periods required to double an original investment, divide the most
convenient "rule-quantity" by the expected growth rate, expressed as a percentage.

For instance, if you were to invest $100 with compounding interest at a rate of 9% per
annum, the rule of 72 gives 72/9 = 8 years required for the investment to be worth $200; an
exact calculation gives ln(2)/ln(1+.09) = 8.0432 years.

Similarly, to DETERMINE the time it takes for the value of money to halve at a given rate,
divide the rule quantity by that rate.

To determine the time for money's buying power to halve, financiers simply divide the rulequantity by the inflation rate. Thus at 3.5% inflation using the rule of 70, it should take
approximately 70/3.5 = 20 years for the value of a unit of CURRENCY to halve.

To estimate the impact of additional fees on financial policies (e.g., mutual fund fees and
expenses, loading and expense charges on variable universal life insuranceinvestment
portfolios), divide 72 by the fee. For example, if the Universal Life policy charges a 3% fee
over and above the COST of the underlying investment fund, then the total account value
will be cut to 1/2 in 72 / 3 = 24 years, and then to just 1/4 the value in 48 years, compared to
holding exactly the same investment outside the policy.

Choice of rule[edit]
The value 72 is a convenient choice of numerator, since it has many small divisors: 1, 2, 3, 4, 6,
8, 9, and 12. It provides a good approximation for annual compounding, and for compounding at
typical RATES (from 6% to 10%). The approximations are less accurate at higher INTEREST
RATES .
For continuous compounding, 69 gives accurate results for any rate. This is because ln(2) is
about 69.3%; see derivation below. Since daily compounding is CLOSE enough to continuous
compounding, for most purposes 69, 69.3 or 70 are better than 72 for daily compounding. For
lower annual rates than those above, 69.3 would also be more accurate than 72.

Rate

Actual Years

Rule of 72

Rule of 70

Rule of 69.3

72 adjusted

E-M rule

0.25%

277.605

288.000

280.000

277.200

277.667

277.547

0.5%

138.976

144.000

140.000

138.600

139.000

138.947

1%

69.661

72.000

70.000

69.300

69.667

69.648

2%

35.003

36.000

35.000

34.650

35.000

35.000

3%

23.450

24.000

23.333

23.100

23.444

23.452

4%

17.673

18.000

17.500

17.325

17.667

17.679

5%

14.207

14.400

14.000

13.860

14.200

14.215

6%

11.896

12.000

11.667

11.550

11.889

11.907

7%

10.245

10.286

10.000

9.900

10.238

10.259

8%

9.006

9.000

8.750

8.663

9.000

9.023

9%

8.043

8.000

7.778

7.700

8.037

8.062

10%

7.273

7.200

7.000

6.930

7.267

7.295

11%

6.642

6.545

6.364

6.300

6.636

6.667

12%

6.116

6.000

5.833

5.775

6.111

6.144

Rate

Actual Years

Rule of 72

Rule of 70

Rule of 69.3

72 adjusted

E-M rule

15%

4.959

4.800

4.667

4.620

4.956

4.995

18%

4.188

4.000

3.889

3.850

4.185

4.231

20%

3.802

3.600

3.500

3.465

3.800

3.850

25%

3.106

2.880

2.800

2.772

3.107

3.168

30%

2.642

2.400

2.333

2.310

2.644

2.718

40%

2.060

1.800

1.750

1.733

2.067

2.166

50%

1.710

1.440

1.400

1.386

1.720

1.848

60%

1.475

1.200

1.167

1.155

1.489

1.650

70%

1.306

1.029

1.000

0.990

1.324

1.523

History[edit]
An early reference to the rule is in the Summa de arithmetica (Venice, 1494. Fol. 181, n. 44)
of Luca Pacioli (14451514). He presents the rule in a discussion regarding the estimation of the
doubling TIME of an investment, but does not derive or explain the rule, and it is thus assumed
that the rule predates Pacioli by some time.

Roughly translated:

A voler sapere ogni quantita a tanto PER 100 l'anno, in quanti anni sa

In wanting to know of any capital, at a given yearly percentage, in how m

Adjustments for higher accuracy[edit]

For higher rates, a BIGGER numerator would be better (e.g., for 20%, using 76 to get 3.8
years would be only about 0.002 off, where using 72 to get 3.6 would be about 0.2 off). This is
because, as above, the rule of 72 is only an approximation that is accurate for INTEREST
RATES from 6% to 10%. Outside that range the error will vary from 2.4% to 14.0%. For every
three percentage points away from 8% the value 72 could be adjusted by 1.

or for the same result, but simpler:

E-M rule[edit]
The EckartMcHale second-order rule (the E-M rule) provides a multiplicative
correction for the rule of 69.3 that is very accurate for rates from 0% to 20%. The
rule of 69.3 is normally only accurate at the lowest end of INTEREST RATES , from
0% to about 5%. To compute the E-M approximation, simply multiply the rule of 69.3
result by 200/(200r) as follows:

.
For example, if the INTEREST RATE is 18%, the rule of 69.3 says t = 3.85
years. The E-M rule multiplies this by 200/(20018), giving a doubling time of
4.23 years, where the actual doubling time at this RATE is 4.19 years. (The EM rule thus GIVES a closer approximation than the rule of 72.)
Note that the numerator here is simply 69.3 times 200. As long as the
product STAYS constant, the factors can be modified arbitrarily. The E-M rule
could thus be written also as

or
in order to keep the product mostly unchanged. In these variants, the
multiplicative correction becomes 1 respectively for r=2 and r=8,
the VALUES for which the rule of 70 (respectively 72) is most precise.
Similarly, the third-order Pad approximant gives a more accurate answer
over an even larger range of r, but it has a slightly more complicated
formula:

Derivation[edit]
Periodic compounding[edit]
For periodic compounding, future value is given by:

where
is the present value, is the number of time periods,
and stands for the interest rate per time period.
The future value is double the present value when the following
condition is met:

This equation is easily solved for :

If r is SMALL , then ln(1 + r) approximately equals r (this is

the first term in the Taylor series). Together with the
approximation

, this GIVES :

which improves in accuracy as the compounding of

interest becomes continuous (see derivation below).
However, humans tend to prefer performing mental
calculations with percentages, so the formula is often
restated as follows:

In order to derive the more precise adjustments

presented ABOVE , it is noted that
more closely approximated by
the SECOND term in theTaylor

is
(using

series).
can then be FURTHER
simplified by Taylor approximations:

Replacing the "R" in R/200 on the third line

with 7.79 gives 72 on the numerator.
This SHOWS that the rule of 72 is most
precise for periodically composed interests
around 8%.
Alternatively, the E-M rule is obtained if the
second-order Taylor approximation is used
directly.

Continuous compounding[edit]

For continuous compounding, the derivation is

simpler and yields a MORE accurate rule: