The Rule of 72 and the Power of Compound Interest

Leonardo Portugal
Founder, AAlexander LLC

Financial investing requires discipline, patience, and knowledge. As an investor, one of the most powerful forces at work in financial markets is compound interest. Compound interest involves continuously reinvesting income or interest earned over time. Through compounding interest, an investment grows and builds wealth. The sooner an investment is submitted to compound interest, the more time it has to accumulate into a larger sum.

The very low interest-rate environment seen during the Great Financial Crisis of 2008–2009 is over, and it is difficult to argue that such a scenario will repeat itself. With very high levels of debt issuance and large volumes of outstanding debt, both public and private, interest rates have risen.

Today, a 10-year US Treasury note yields around 4.95% annually, while, in Germany, a public note with the same maturity yields 3.44% per year, compared to 5.2% in the UK and close to 3% in Japan. These returns are denominated in the currency in which the note is issued: yen in Japan, pounds in the UK, euros in Germany, and dollars in the US.

Risk management is very important in any financial investment. Higher rates/returns translate into higher risk. Investing in fixed income is riskier when interest rates rise. Very short-term government securities are generally considered among the closest investments to the concept of a risk-free asset. In the US, Treasury bills, which have maturities ranging from 28 to 364 days, are, globally, the closest an investment gets to a risk-free investment idea. Currently, an 8-week Treasury bill has an annual yield of around 4%.

Higher interest rate increases payoffs to an investor when it manages to compound its investment continuously. When a fixed-income investment is held until maturity and any income or interest received is continuously reinvested over time, the capital invested tends to grow substantially.

A simple back-of-the-envelope rule for estimating how many years it will take for an investment to double is to divide 72 by the annual return the investment receives. Over the last 30 years, the S&P500 nominally returns 12% yearly. At that rate, an investment in the S&P500, compounded annually, regardless of the amount invested, would double in 6 years (72/12 = 6). Currently, a 10-year US Treasury note yields 4.95% annually. With compound interest, investing in a 10-year US Treasury note doubles the amount invested in 14.5 years (72/4.95 = 14.5 years). A €10k investment in a 10-year German bund at the current 3.44% yield annually, doubles to EUR€20K in 20.9 years (72/3.44 = 20.9 years) when all proceeds are continuously compounding.

The 72 rule implies a zero-reinvestment risk. In other words, it assumes that an investor is able to constantly invest all income and/or interest earned at the same interest rate as the initial investment. For those interested in the reasoning behind the calculation of the rule of 72, see the footnote below.

It is also very important to preserve the purchasing value of an investment over time. In fixed income, there are alternatives, both in public and private securities, that yield a real interest rate. Earning a real interest rate guarantees that the purchasing power of the investment earns a return that is at least larger than the inflation rate over the same period in which the investment is held. Compounding an investment yielding a real return is essential for preserving and accumulating wealth in times inflation runs high. In the US, a 10-year Treasury Inflation-Protected Security (TIPS) currently offers a real interest rate close to 2.6% annually. The rule of 72 can be used to estimate the time it takes to double an investment with either nominal or real returns.

Allowing time to work in your favor pays off.

Compound interest is very powerful.

Use it.

Invest wisely.

Market data as of September 22, 2026. Sources: Bloomberg and Yahoo Finance.

Important Disclosure: This material is provided for informational and educational purposes only and should not be construed as personalized investment advice or a recommendation to buy or sell any security. Past performance does not guarantee future results. Investments involve risk, including the possible loss of principal. Examples and calculations are illustrative and rely on assumptions that may not reflect actual investment results. AAlexander LLC is a registered investment adviser. Registration does not imply a certain level of skill or training.

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Footnote

The rule of 72 is a good estimate to calculate the number of years it will take an investment to double when it faces compound interest at a pre-determined rate of return.

Let:

2P = P*(1+R)^T

where P is the principal amount initially invested, R is the annual rate of return, and T the number of years.

Having the amount of capital initially invested (P) and knowing the expected annual return (R), solve for T to know in how many years (T) it takes P to double.

2P = P*(1+R)^^T

T = ln2/ln(1+R) where ln is the natural logarithm.

T = 0.693/R.

Plug in R, and you have the numbers of years (T) it takes to double an investment when compounding at a rate of R.

The number 72 is easier to divide than 69.3. So, to make reasoning and calculation simpler, divide 72 by R to get a close estimate of the number of years (T) it takes P to double when it submitted to compound interest by R.