Question
What is compounding and how does the rule of 72 work?
Answer
Bottom line: Compounding earns returns on your returns, and the rule of 72 estimates how long money takes to double.
1. Rule of 72
Divide 72 by the annual return to get the approximate years to double — at 12%, about 6 years; at 8%, about 9.
2. Why it matters
Small differences in rate or time make a large difference to the final corpus.
3. A rule of thumb
It is most accurate around 6 to 10% returns.
See it in action with our Compound Interest Calculator.
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