The Rule of 72 and the magic of compound interest

10 April 2025 by National Bank

How quickly can your investment double in value thanks to the power of compound interest? There’s no need for any complex mental calculations: a simple formula will give you the answer. We’ll help you better understand the Rule of 72 and the magic of compound interest.

In this article:

What is compound interest?
What is the Rule of 72?
Why is compound interest a profitable option?
How can the Rule of 72 help you invest more wisely?

What is compound interest?

Compound interest is a financial mechanism that reinvests the interest earned on initial capital to generate additional gains. In other words, it’s interest on interest.

Unlike simple interest, which yields a profit on an initial investment alone, compound interest also grows the accumulated interest over time. A compound interest investment will therefore grow much faster than a simple interest investment at the same rate of return.

Understanding compound interest

This example shows the compound interest you’d generate if you invested $100 at an annual interest rate of 3%:

First year: $1000 × 3% = $30 in interest
Second year: ($1,000 + $30) × 3% = $30.90 in interest
Third year: ($1,030 + $30.90) × 3% = $31.83 in interest

→ Check out our article to learn more about interest

What is the Rule of 72?

The Rule of 72 is an easy calculation that shows how long it will take for an investment to double in value thanks to compound interest. To determine the number of years required to double your investment, simply divide the number 72 by the annual rate of return.

Understanding the Rule of 72

1% rate of return: 72 ÷ 1 = approximately 72 years
2% rate of return: 72 ÷ 2 = approximately 36 years
7% rate of return: 72 ÷ 7 = approximately 10 years

You can also use the Rule of 72 to calculate the rate of return needed to double an initial investment within certain time periods. For example, for your investment to double in value in 12 years, you’ll need to invest it at an interest rate of 6% (72 ÷ 12 = 6).

Why is compound interest a profitable option?

Compound interest is an excellent strategy for optimizing your personal finances because it allows your money to grow exponentially. The longer you let your investments grow, the more interest you’ll earn. This makes it possible to accumulate significant wealth over the long term, especially if you start investing early.

Here are some financial products that leverage compound interest:

Savings accounts
Term deposits
Most Guaranteed Investment Certificates (GICs)
Certain government bonds

For other products, such as corporate bonds and some government bonds, you have to reinvest the equivalent of the interest every year to get a similarly good return.

→ Check out our article to learn more about mutual funds

How can the Rule of 72 help you invest more wisely?

The Rule of 72 is a tool that many investors use to assess rates of return and investment horizons.

This simple calculation also makes it easier to visualize the benefits that compound interest can produce over the long term on a consistent basis. Try calculating how long it will take for your investments to double in value based on their rate of return. This may encourage you to let your investments grow even longer.

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More articles:

Check out these articles to find out how to invest more effectively.

→ Investment ideas: 5 ways to invest $1,000
→ How to invest my money
→ How does the stock market work?
→ Your guide to investments: read before investing
→ Are you ready for self-directed investing?

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