The Rule of 72: The Simple Mental Shortcut to Financial Freedom
Learn how to use the Rule of 72 to quickly estimate how long it will take for your UK investments to double. A simple financial planning trick explained.
In the world of finance, there are many complex formulas and dense spreadsheets. But what if one of the most powerful tools for understanding your financial future was a simple calculation you could do in your head in under five seconds? Welcome to the Rule of 72.
This elegant rule of thumb is a favourite of investors and financial planners for its ability to quickly demonstrate the incredible power of compound interest. At Plouta, we believe that simple, powerful concepts like this are key to building financial confidence and independence. This guide will explain exactly what the Rule of 72 is, how to use it to forecast your investments, and how it can also serve as a stark warning about the impact of inflation on your savings.
What You Will Learn in This Guide ⤵
What the Rule of 72 is: A clear definition and the simple formula.
Putting it into Practice: How to use it to estimate investment growth.
The "Dark Side" of the Rule: Understanding how inflation can halve your money's value.
Practical Examples: See how different growth rates impact your wealth over time.
Limitations: Understanding when the rule is useful and when you need more detail.
What is the Rule of 72?
The Rule of 72 is a quick, mental shortcut used to estimate the number of years it will take for an investment to double in value, given a fixed annual rate of return.
The formula is incredibly simple:
72 ÷ [Your Annual Interest Rate] = [Approximate Number of Years to Double]
That's it. No complex calculators or spreadsheets needed.
Using the Rule of 72 for Your Investments
Let's see how this works with some practical examples for your savings and investments, such as those in your SIPP or Stocks & Shares ISA.
Scenario 1: A Cautious Portfolio You have a portfolio that you expect will deliver an average annual return of 4% after fees.
Calculation: 72 ÷ 4 = 18 years
Conclusion: At a 4% growth rate, your money would be expected to double approximately every 18 years. A £50,000 pot today could be worth £100,000 in 18 years, and £200,000 in 36 years.
Scenario 2: A Balanced Portfolio You aim for a more balanced approach, targeting an average annual return of 7%.
Calculation: 72 ÷ 7 = ~10.3 years
Conclusion: At a 7% growth rate, your money doubles roughly every decade. That £50,000 pot could become £100,000 in just over 10 years, £200,000 in 20 years, and £400,000 in 30 years.
Scenario 3: A Growth-Oriented Portfolio You take on more risk, targeting an average annual return of 10%.
Calculation: 72 ÷ 10 = 7.2 years
Conclusion: At a 10% growth rate, your money doubles approximately every 7 years. This is where wealth can be built rapidly over the long term.
This simple calculation instantly demonstrates the profound impact that a seemingly small difference in your annual rate of return can have on your long-term wealth, thanks to the power of compounding.
Rule of 72 Calculator
Enter your expected annual return (%) or view sample values:
| Interest Rate (%) | Years to Double ≈ |
|---|---|
| 4% | 18 years |
| 6% | 12 years |
| 8% | 9 years |
| 10% | 7.2 years |
| 12% | 6 years |
The "Dark Side" of the Rule: Understanding Inflation
The Rule of 72 is not just for good news. It can also be used to show the destructive power of inflation on your cash savings. Inflation is the rate at which the cost of living increases, eroding the purchasing power of your money.
You can use the same formula to estimate how long it will take for inflation to halve the value of your savings.
72 ÷ [The Inflation Rate] = [Approximate Number of Years for Your Money's Value to Halve]
Scenario 1: Moderate Inflation Let's say the long-term average rate of inflation is 3%.
Calculation: 72 ÷ 3 = 24 years
Conclusion: If you leave £50,000 in cash under your mattress (or in an account earning 0% interest), its real-terms purchasing power could be halved to just £25,000 in 24 years.
Scenario 2: High Inflation Imagine a period of higher inflation, at 6%.
Calculation: 72 ÷ 6 = 12 years
Conclusion: At this rate, the value of your cash savings would halve in just 12 years.
This is a stark illustration of why, for long-term goals, you must invest your money to achieve a rate of return that is higher than the rate of inflation. Otherwise, you are effectively becoming poorer over time.
Where Does the Rule of 72 Come From and What Are Its Limitations?
The rule is a simplified mathematical approximation derived from more complex logarithm formulas. While incredibly useful for quick mental estimates, it's important to be aware of its limitations:
It's an Approximation: The rule is most accurate for interest rates in the 6% to 10% range. For very low or very high rates, it becomes less precise, but still provides a useful ballpark figure.
Assumes a Fixed Rate: It works best with a consistent, unchanging rate of return, which rarely happens in real-world investing where returns fluctuate year to year.
Doesn't Account for Taxes or Fees: The calculation is based on a gross rate of return. You must use your expected return after any platform fees or charges. The calculation also doesn't account for taxes that might be due on growth outside of a tax-free wrapper like an ISA or a pension.
Doesn't Factor in Contributions: The rule is designed to show the doubling time for a single lump sum of money. It doesn't calculate the future value of a pot you are actively contributing to.
Know Where You Stand: Take the Plouta Financial Wellness Survey
Taking our Financial Wellness Survey is a great first step. It will help you reflect on your habits and identify the key areas to focus on in your journey towards financial freedom.
Conclusion: A Powerful Tool for Your Financial Mindset
The Rule of 72 is not a precise financial planning instrument, and it should never replace a detailed calculation using a proper pension or investment calculator.
However, its true power lies in its ability to change your mindset. It gives you an immediate, intuitive understanding of the fundamental principles of wealth building:
It shows you that small differences in returns matter enormously over the long term.
It proves that time and patience are your greatest allies in investing.
It demonstrates that inflation is a powerful enemy of your cash savings.
By using this simple mental shortcut, you can better appreciate the long-term consequences of your financial decisions, helping you to stay motivated and focused on your journey to financial freedom.
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Disclaimer: This article provides general information about a financial rule of thumb and is for informational and educational purposes only. It does not constitute financial advice. The examples are illustrative and based on assumed rates of return and inflation, which are not guaranteed. The value of investments can go down as well as up, and you may get back less than you invested. Always use a detailed financial calculator and consider seeking professional, regulated financial advice for your personal circumstances.