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The prime interest rate is the interest rate that banks charge their best customers. It’s the lowest rate offered to individuals and corporations that are considered low risk by banks — those with good credit history who aren’t likely to miss payments or default on their loan.

But when you run into the term “prime interest rate” in your daily life (maybe you’re taking out a personal loan or applying for a mortgage), it’s pretty common to feel a little confused, unless you majored in economics in college.

To get a better handle on this financial term and know how it relates to your money, read on. You’ll learn how this interest rate is set, a bit about its history, and how it can impact you.

How Is the Prime Interest Rate Set?

You’ve just learned that the prime interest rate is the rate that banks charge their best customers. Take a closer look at how the prime interest rate is set, as well as how this figure fits into the larger financial landscape.

Individual banks determine their prime interest rate. While the Federal Reserve has no direct role in setting the prime rate, many banks choose to set their prime rates based partly on the target level of the federal funds rate.

The federal funds rate is the rate that banks charge each other on an overnight basis and is established by the Federal Open Market Committee.

Why do banks lend each other money? They do so in order to meet the reserve requirement, which is also set by the Federal Reserve.

This is the minimum amount of cash a bank must have in their vault or at the closest Federal Reserve bank. If one bank has excess cash, the bank has a financial incentive to lend that excess cash to a bank that has less than its federally mandated amount. The reserve requirement acts as a lending limit for banks and also ensures that they have enough cash on-hand for the start of business each day.

How Does the Prime Rate Compare

Generally, the prime rate is about three percent higher than the federal funds rate. That means that when the Fed raises interest rates, the prime rate typically goes up as well.

Because the prime interest rate is typically aligned with the federal funds rate, it’s highly susceptible to change. How often could the prime rate change? It can shift quite a bit. Take, for instance, the fact that the prime rate was 3.25% on March 16, 2020. From that date to July 2023, it rose 11 times to 8.50%.


💡 Quick Tip: A low-interest personal loan from SoFi can help you consolidate your debts, lower your monthly payments, and get you out of debt sooner.

Why Is the Prime Interest Rate Important?

The prime interest rate impacts all kinds of loans, including interest rates for mortgages, credit cards, auto loans, and personal loans. Typically, banks and lenders will use the prime interest rate as a benchmark for setting interest rates for their customers. Consider some of the ways this can impact personal finance and the economy:

•   Changes in the federal funds rate and prime interest rate can impact variable rate credit cards, adjustable-rate mortgages, home equity lines of credit (HELOC), and more. The interest rates on variable loans are based on these market interest rates and therefore change over time. In fact, variable interest rates, including those on credit cards, are often expressed as the prime rate plus a certain percentage.

Unlike fixed-rate loans, monthly payments on any variable loan could change considerably from month-to-month. This is why fixed-rate loans can be a more desirable alternative than variable loans for some borrowers.

•   Though rates are largely influenced by the Federal Reserve, borrowers have little control or way of predicting the rates from year to year. Even when the Federal Reserve predicts growth, interest rates can rise due to a variety of factors, causing your monthly bill to rise with it.

•   Beyond individual borrowers, the prime interest rate also influences the financial market as a whole. A low prime rate makes it easier and less expensive to borrow loans which increases liquidity in the market.

•   Historically, when the prime rate is low, the economy grows. That’s why, if there’s a recession, rates may go down, with the goal of getting consumers and businesses to borrow again and stimulate the economy.

When the prime rate is high, economic growth slows down. For instance, recently interest rates were raised, which can nudge consumers to think twice about spending. This can lower demand and help bring down inflation’s impact.

•   The prime rate isn’t the only benchmark that banks use to inform interest rates. Banks also often use the London Interbank Offer Rate (LIBOR). The LIBOR is the rate that banks charge each other for short-term loans. The federal funds rate, prime interest rate, and LIBOR rates generally fluctuate together. When the three rates are out of sync, this can be an indicator of an issue with the financial markets.

Recommended: Can You Refinance a Personal Loan?

Personal Loans with SoFi

An increase in the prime rate and federal funds rate can be an indicator that changes are ahead for consumers. Variable rates may be on the rise, too, so think carefully about how that might impact your finances.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.

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SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Putting in a pool can turn your backyard into an oasis for parties, playtime for kids, and weekend relaxation. Unfortunately, installing an in-ground swimming pool costs over $55,000 on average, which can leave many homeowners wondering how to cover the cost of installing a swimming pool.

What are your options if you don’t have enough cash? Can you get swimming pool financing? Fortunately, yes. You actually have several options for financing a pool, including a cash-out refinance, a home equity loan or credit line, and a personal loan. Read on for a closer look at different types of pool financing and their pros and cons.

How to Finance a Swimming Pool

If you don’t have enough money saved to pay upfront for a pool — or even if you do — you might be wondering what types of loans or other options are appropriate for this type of backyard remodel.

There are several pool financing choices available to homeowners — including credit cards, pool company financing, cash-out refinancing, home equity loans, home equity lines of credit, and home improvement loans.

Before you take the plunge into financing a pool, it’s a good idea to consider the pros and cons of each type, including the overall costs of borrowing and whether you might qualify for a particular type of loan. What follows is a guide to four of the most popular pool financing options.

Using a Cash-Out Refinance to Pay for a Pool

If you have significant equity built up in your home, you may want to consider a cash-out refinance. Equity refers to the amount of your home’s value that you’ve actually paid off. Put another way, it’s the difference between your mortgage balance and your home’s current value.

With a cash-out refinance, you replace your existing mortgage with a new mortgage for a larger amount. You receive the overage as cash back, which you can then use to cover virtually any expense, including the installation of a swimming pool.

Pros of a Cash-Out Refinance

A cash-out refinance comes with a number of potential benefits:

•   Access to large loans You may be able to borrow up to 80% of your home’s equity, which could be enough to cover the cost of putting in a pool — and maybe even some extras, like a new barbecue or lounge chairs.

•   A lower rate Borrowers with good or improved credit, or those who bought their home when interest rates were higher, may be able to refinance to a lower interest rate.

•   Potential tax deductions A mortgage interest tax deduction may be available on a cash-out refinance if the money is used for capital improvements on your property. (Consult with a tax professional for more details on how this applies to your situation.)

Cons of a Cash-Out Refinance

There are also some downsides to going the cash refi route, including:

•   Involved application process Borrowers must go through the mortgage application process all over again to get a new loan, which usually means submitting updated information, getting an appraisal, and waiting for approval.

•   Closing costs You may have to pay closing costs, generally from 2% to 6% of the total loan amount. (That’s the old loan plus the lump sum that’s being added.)

•   Foreclosure risk Your mortgage is a secured loan, which means if you can’t make your payments, you could risk foreclosure.

Using a Home Equity Line of Credit to Finance a Pool

Another way you can use your home’s equity to finance a pool is to take out a home equity line of credit (HELOC).

A HELOC is a revolving line of credit that uses your home as collateral. It works much like a credit card in that:

•   The lender gives you a credit limit to draw from, and you only repay what you borrow, plus interest.

•   As you pay back the money you owe, those funds become available to you again for a predetermined “draw” period (usually five to 10 years).

Pros of a HELOC

Here’s why a HELOC can be a popular way to pay for home improvements like adding a pool:

•   Flexibility Instead of borrowing money in one lump sum, a HELOC allows you to tap into the line only as needed. Plus, you only pay interest based on the amount you actually borrow, not the entire amount for which you were approved, as you would with a regular loan.

•   Low rates The interest rates are generally lower than credit cards and unsecured personal loans.

•   Potential tax deductions The interest on HELOC payments might be tax deductible if the funds were were to buy, build, or substantially improve your home, and you itemize your deductions.

Cons of a HELOC

HELOC also have a few potential drawbacks, which include:

•   Variable interest rates HELOCs generally come with a variable interest rate, which means when interest rates increase, the monthly payments could go up. Although there may be a cap on how much the rate can increase, some borrowers might find it difficult to plan around those fluctuating payments.

•   HELOCs are easy to use — and overuse Some of the same things that can make a HELOC appealing (easy access to cash, lower interest rates, and tax-deductible interest) could lead to overspending if borrowers aren’t disciplined.

•   Foreclosure risk A HELOC is secured by an asset (your house). If you stop making the payments on the HELOC, you could lose your home.

Recommended: The Different Types Of Home Equity Loans

Using a Home Equity Loan for Pool Financing

A home equity loan is yet another way to tap into the money you’ve already put into your home. But unlike a HELOC, borrowers receive a lump sum of money.

Pros of a Home Equity Loan

Home equity loans have several benefits that make them worth considering for financing a swimming pool:

•   Predictable payments Unlike HELOCs, which typically come with a variable interest rate, home equity loans usually have a fixed interest rate. The borrower can expect a reliable repayment schedule for the duration of the loan.

•   Low rates Because it’s a secured loan, lenders usually consider a home equity loan lower risk and, therefore, offer lower rates. Secured loans also tend to be easier to qualify for than unsecured loans.

•   Potential tax deductions And, once again, there is a potential tax break. If the loan is used for capital improvements to the home, and you itemize your deductions, the interest may be deductible.

Cons of a Home Equity Loan

There are also some downsides to a home equity loan:

•   Rates may be higher than HELOCs Because a home equity loan’s interest rate won’t fluctuate with the market, the rate for a home equity loan is typically higher.

•   Closing costs As with most loans involving real estate, you’ll likely have to pay closing costs. These costs can range from 2% to 5% of the loan amount.

•   Foreclosure risk You may put your home at risk for foreclosure if you can’t make your loan payments.

Using a Personal Loan

You don’t necessarily have to tap into your home’s equity to finance a swimming pool. Many banks, credit unions, and online lenders offer unsecured personal loans that can be used for home improvements, including the installation of a swimming pool.

If you haven’t owned your home for long, or if your home hasn’t gone up much in value while you’ve owned it, a personal loan may be worth considering.

Pros of a Personal Loan for Pool Financing

Here’s a look at some of the advantages of using a personal loan for a home renovation like a pool:

•   Simple application process Applying for an unsecured personal loan is typically quicker and simpler than applying for a secured loan. With a personal loan, you don’t have to wait for a home appraisal or wade through the other paperwork necessary for a loan that’s tied to your home’s equity.

•   Fast access to funds Personal loan application processing and funding speeds vary, but many lenders offer same- or next-day funding.

•   Lower risk Because your home isn’t being used as collateral, the lender can’t foreclose if you don’t make payments. (That doesn’t mean the lender won’t look for other ways to collect, however.)

Cons of a Personal Loan for Pool Financing

Personal loans also come with some disadvantages. Here are some to keep in mind:

•   Higher interest rates Personal loans are unsecured, which means they generally come with a higher interest rate than secured loans that use your property as collateral. (However, borrowers who have good credit and don’t appear to be a risk to lenders still may be able to obtain loan terms that work for their needs.)

•   Origination fees Many (though not all) personal loan lenders charge an origination fee of between 1% and 6%, adding costs you might not have anticipated.

•   Less borrowing power Personal loan amounts range from $1,000 to $100,000 but how much you can borrow will depend on the lender and your qualifications as a borrower. With a home equity loan or credit line, you may be able to access more — up to 80% of your home’s value, minus your outstanding mortgage.

Should You Finance a Pool?

Installing a pool is an expensive home improvement, so you may need to borrow some money to pay for all or part of the project. Even if you have enough cash saved to pay upfront for a pool, you may still want to consider financing some or most of the project if you want to keep cash accessible for emergencies and other needs.

Financing with a low-interest loan (provided you can afford the payments) can make paying for a pool manageable. But before you borrow a large sum, you may want to consider how long you plan to live in your current home, how much pool maintenance might cost each month, if you’ll actually use the pool enough to make it a worthwhile purchase, and if the value added to your home is worth the investment.

The Takeaway

Due to the high initial investment required for installing a new pool, many homeowners opt to borrow money for the project and pay it off over time. Fortunately, you have a few different options for pool financing.

If you have significant home equity and are looking for fixed monthly payments, you might consider using a home equity loan to finance your pool. If you have significant home equity but want flexibility in your payments, you might prefer a HELOC.

If, on the other hand, you have good credit but not a lot of equity in your home — or you’d prefer not to put your home on the line — it may be worth looking at a personal loan for pool financing.

Ready to dive into your pool project? Consider a SoFi Personal Loan. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.

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SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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Unsecured personal loans are loans provided by banks, credit unions, and online lenders that do not require any type of collateral. They provide an opportunity to borrow funds without putting any of your assets (like your home or car) at risk. The funds can be used for virtually any purpose, including debt consolidation, home improvements, and large purchases.

How do you know if an unsecured personal loan is the right choice for you? We’ll dive into exactly what an unsecured personal loan is, the benefits of an unsecured personal loan, and how to choose the best loan for your situation.

What Is an Unsecured Loan?

An unsecured loan is a loan that is not backed by collateral, such as your home, bank account balances, or vehicle. To have a loan “backed” by an asset means that a bank or lender has the right to take that asset in the event of default on the loan.

Loans backed by collateral (such as mortgages, home equity loans, and auto loans) generally pose less risk to lenders — if the borrower defaults, they can recoup the balance due by seizing the collateralized property. Because unsecured loans pose a higher risk, they tend to have higher interest rates and come in lower loan amounts compared to secured loans.

Some borrowers, however, prefer unsecured loans, since they don’t require you to put your home, car, or other personal assets at risk. You qualify for an unsecured personal loan strictly on your ability to repay the borrowed amount. Lenders assess this by looking at your income, credit scores, and borrowing history.


💡 Quick Tip: Some personal loan lenders can release your funds as quickly as the same day your loan is approved.

What Are Common Uses for Unsecured Personal Loans?

Unsecured personal loans can be used for a wide array of purposes. Here are some of the most common reasons why people take out unsecured personal loans.

Credit Card Payoff

Credit cards tend to have high annual percentage rates (APRs). Currently, the average credit card interest rate is 28.02%. Personal loans, on the other hand, charge an average interest rate of 11.31 (if you have a high credit score, you may be able to get a lower APR).

Using a personal loan to pay off credit card debt can potentially help you save money on interest. You can get an estimate of the potential savings of using an unsecured personal loan to pay off a credit card balance by using a personal loan calculator.

Debt Consolidation

If you make many different credit card (or other debt) payments every month, it can be difficult to keep track of all the due dates and minimum amounts owed. If you miss a payment or don’t pay at least the amount due, you can get hit with late fees and your credit could be negatively affected.

Debt consolidation is the process of taking out an unsecured personal loan and using it to pay off multiple debts, leaving you with just one monthly payment. This simplifies repayment and, if you get a loan with a lower interest rate, could also help you save money.

Medical Expenses

Unsecured personal loans can be used to pay for a range of medical treatments, including elective procedures, fertility treatments, prescriptions, surgeries, dental procedures, and more.

A number of lenders, including certain banks, credit unions and online lenders, offer personal loans that can be used for medical expenses. Though interest expenses will add to the total cost of treatment, this can be a less expensive option than putting the medical expense on your credit card.

Home Projects

Whether you’re thinking about updating your kitchen or renovating a bathroom, you may be able to use an unsecured personal loan, also called a home improvement loan, to obtain funding for the project.

An unsecured personal loan can be especially useful if you need cash quickly for critical repairs or emergencies. It also provides an alternative to taking out a home equity loan or line of credit for remodeling or repairs, both of which are secured loans and require equity in your home.

What Are Some Different Types of Unsecured Loans?

The most common types of unsecured loans include:

•   Personal loans Personal loans are typically unsecured, though some lenders offer secured options. Loan amounts range from $1,000 to $50,000, with repayment terms of two to seven years. Interest rates are typically fixed.

•   Personal lines of credit A personal line of credit is a revolving loan, which means the loan can be spent, repaid, and spent again, similar to a credit card. While some credit lines are secured, many lenders offer unsecured options. Personal credit lines typically have a variable interest rate.

•   Student loans Education loans are used to cover the cost of college tuition and expenses. Both federal and private student loans are unsecured. However, student loans usually carry more restrictions and payback instructions than other types of unsecured loans.

•   Credit cards Like a personal credit line, credit cards are a type of revolving loan that lets you access money up to a certain limit as you need it and only pay interest on the amount you borrow. While secured credit cards are available, most consumer cards do not require collateral.

Why Choose an Unsecured Personal Loan?

Here’s a look at some of the benefits of unsecured personal loans.

•   Fast processing time It often doesn’t take long to get the lump sum of money in your hands — often just a few days or so.

•   Consistent payments Personal loans are a type of installment loan, which means payments will be fixed and follow a set schedule.

•   Less costly than credit cards With good credit, interest rates on unsecured personal loans are typically lower than interest rates on credit cards.

•   Flexibility An unsecured personal loan can be used for almost any purpose, including credit card consolidation, a large purchase (like an appliance), a wedding, travel, medical expenses, home repairs, and more.

•   No collateral You don’t need to put anything of value at risk of repossession in order to secure the loan.

Applying for an Unsecured Personal Loan

Before you apply for an unsecured personal loan it’s a good idea to check your credit score, since it will play a role in your loan eligibility and interest rate.

Next, you’ll want to research and compare lenders, including banks, credit unions, and online lenders. It can be a good idea to compare loan amounts, interest rates, terms, and fees. Also check loan requirements, if they are available. Some lenders have a minimum credit score or income requirements.

In some cases, you may be able to pre-qualify for a personal loan, which lets you see the loan terms you may qualify for. This involves a soft credit check, which won’t impact your credit.

Once you find a loan you like, it’s time to officially apply. Often, you can do this online, though some lenders may require you to apply in person. Either way, you’ll need to provide personal and financial information (such as your name, home address, and employment information). In addition, you may need to provide the following documents:

•   State-issued ID

•   Proof of residence

•   Proof of income (like a bank statement or pay stub)

•   Tax return

Once you submit your application, you may receive a decision within a few minutes or a few days, depending on the lender.


💡 Quick Tip: Just as there are no free lunches, there are no guaranteed loans. So beware lenders who advertise them. If they are legitimate, they need to know your creditworthiness before offering you a loan.

The Takeaway

For some of life’s many curveballs — or opportunities — the occasional need for an unsecured personal loan might come up. Unlike a secured loan (like an auto loan, mortgage, or car title loan), an unsecured personal loan doesn’t require you to provide anything of value to guarantee it. You qualify based only on your ability to repay the borrowed amount to the lender.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.

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SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

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The Rule of 72 is a shortcut equation to help you figure out just how long it will take to double an investment at a given rate of return. Best of all, the math is easy to do without the help of a calculator.

In short, the Rule of 72 can help investors determine whether an investment may have a place in their overall investment strategy, and how to proceed.

What Is the Rule of 72?

As noted, the Rule of 72 helps investors understand how different types of investments might figure into their investment plans. The basic formula for the rule is:

Number of years to double an investment = 72 / Interest rate

In the case of investing, the interest rate is the rate of return on an investment. For example, an investor has $10,000 to invest in an investment that offers a 6% rate of return. That investment would double in 72 / 6 = 12 years. Twelve years after making an initial investment, the investor would have $20,000.

Notice that when making this calculation, investors divide by six, not 6% or 0.06. Dividing by 0.06 would indicate 1,200 years to double the investment, an outlandishly long time.

This shorthand allows investors to quickly compare investments and understand whether their rate of return will help them meet their financial goals within a desired time horizon.

Who Came Up with the Rule of 72?

The Rule of 72 is not new, in fact, it dates back to the late 1400s, when it was referenced in a mathematics book by Luca Pacioli. The Rule itself, though, could date even further back. Albert Einstein is often credited with its invention, however.


💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.

The Formula and Calculation of the Rule of 72

The Rule of 72 is a shortened version of a logarithmic equation that involves complex functions you would need a scientific calculator to calculate. That formula looks like this:

T = ln(2) / ln(1 + r / 100)

In this equation, T equals time to double, ln is the natural log function, and r is the compounded interest rate.

This calculation is too complicated for the average investor to perform on the fly, and it turns out 72 divided by r is a close approximation that works especially well for lower rates of return. The higher the rate of return — as the rate nears 100% — the less accurate the Rule of 72 gets.

Example of the Rule of 72 Calculation

For a relatively simple equation, the Rule of 72 can help investors figure out a lot of helpful information. For one, it can help them compare different types of investments that offer different rates of returns.

For example, an investor has $25,000 to invest and plans to retire in 20 years. In order to meet a certain retirement goal, that investor needs to at least double their money to $50,000 in that time period.

The same investor is presented with two investment options: One offers a 3% return and one offers a 4% return. The investor can quickly see that at 3% the investment will double in 72 / 3 = 24 years, four years past their retirement date. The investment with a 4% return will double their money in 72 / 4 = 18 years, giving them two years of leeway before they retire.

The investor can see that when choosing between the two options, choosing the 4% rate of return will help them reach their financial goals, while the 3% return will leave them short.

Applying the Rule of 72 in Investment Planning

There are numerous instances in which the Rule of 72 can be applied to investment planning. But it’s also important to understand a bit about how simple and compound interest differ, and come into play when using the Rule to make projections.

Remember, there are two types of interest rates: simple interest and compound interest.

Simple interest is calculated using only the principal or starting amount. For example, an individual opens an account with $1,000 and a 1% simple interest rate. At the end of the year, they will have $1,010 in their bank account. But they’ll only earn 1% each year on their principal, aka that initial $1,000.

So even over a longer time period, the individual isn’t earning very much—after 10 years, for example, they will have accumulated a total of $1,100.

Simple interest may be even easier to conceptualize as a savings account from which an individual withdraws the interest each year.

In the example above the individual would withdraw $10 at the end of the year and start again with $1,000 the next year. Every year after that, they would start over with the same principal and earn the same amount in interest.

Compound interest, on the other hand, can help investments grow exponentially. That’s because it incorporates the interest earned on an investment in addition to the initial investment. In other words, an investor earns a return on their returns.

To get an idea of the power of compound interest it might help to explore a compound interest calculator, which allows users to input principal, interest rate, and compounding period.

For example, an individual invests that same $1,000 at a 6% interest rate for 30 years with interest compounding annually. At the end of the investment period, they will have made more than $5,700 without making any additional investments.

That fact is important to consider when conceptualizing the Rule of 72, because compound interest plays a big role in helping an investment double in value within a given time frame. It can help achieve high reward with relatively little effort.

Practical Uses in Financial Projections

Higher returns are often correlated with higher risk. So this rule can help investors gauge whether their risk tolerance — or their return on investment — is high enough to get them to their goal. Depending on what their time horizon is, investors can easily see whether they need to bump up their risk tolerance and choose investments that offer higher returns.

By the same token, this rule can help investors understand if their time horizon is long enough at a certain rate of return. For example, the investor in the above example is already invested in the instrument that offers 3%.

The Rule of 72 can illustrate that they may need to rethink their timeline for when they will retire, pushing it past 20 years. Alternatively, they could sell their current investments and buy a new investment that offers a higher rate of return.

It’s also important to understand that the Rule of 72 does not take into account additional savings that may be made to the principal investment. So if it becomes clear that the goal won’t be met at the current savings rate, an investor will be able to consider how much extra money to set aside to help reach the goal.

Estimating Investment Doubling Times

Using the Rule of 72 to estimate investment doubling times can be a little tricky, and perhaps inaccurate, unless an investor has a clear idea of what the expected rate of return for an investment will be. For instance, it may be very difficult to get an idea of an expected return for a particularly volatile stock. As such, investors may want to proceed with caution when using it to calculate investment doubling times.

Application in Stock Market Investments

As mentioned, stock market investments can be difficult to predict. But some are more predictable than others. For example, investors can probably use the historic rate of return for the S&P 500 to try and get a sense of an expected return for the market at large – which can help when applying the Rule of 72 to index funds or other broad investments.

For example, if a 401(k) plan includes investments that offer a 6% return, the investment will double in 12 years. Again, that’s an estimate, but it gives investors a ballpark figure to work with.

Use During Periods of Inflation

Money loses value during bouts of inflation, which means that the Rule of 72 can be used to determine how long it’ll take a dollar’s value to fall by half – the opposite of doubling in value.

Accuracy and Limitations of the Rule of 72

The Rule of 72 has its place in the investing lexicon, but there are some things about its accuracy and overall limitations to take into consideration.

Is the Rule of 72 Accurate?

Perhaps the most important thing to keep in mind about the Rule of 72’s accuracy is that it’s a derivation of a larger, more complex operation, and therefore, is something of an estimate. It’s not perfectly accurate, but will get you more of a “ballpark” figure that can help you make investing decisions.

Situations Where the Rule is Most Accurate

The Rule of 72 is only an approximation and depending on what you’re trying to understand there are a few variations of the rule that can make the approximation more accurate.

The rule of 72 is most accurate at 8%, and beyond that at a range between 6% and 10%. You can, however, adjust the rule to make it more accurate outside the 6% to 10% window.

The general rule to make the calculation more accurate is to adjust the rule by one for every three points the interest rate differs from 8% in either direction. So, for an interest rate of 11%, individuals should adjust from 72 to 73. In the other direction, if the interest rate is 5%, individuals should adjust 72 to 71.

Comparisons and Variations on the Rule

There are a few alternatives or variations of the Rule of 72, too, such as the Rule of 73, Rule of 69.3, and Rule of 69.

Rule of 72 vs. Rule of 73

The basic difference between the Rule of 72 and the Rule of 73 is that it’s used to estimate the time it takes for an investment’s value to double if the rate of return is above 10%. The Rule of 73 is only a slight tweak to the rule of 72, using different figures in the calculation.

Rules of 72, 69.3, and 69

Similarly to the Rule of 73, some people prefer to use the Rule of 69.3, especially when interest compounds daily, to get a more accurate result. That number is derived from the complete equation ln(2) / ln(1 + r / 100). When plugged into a calculator by itself, ln(2) results in a number that’s approximately 0.693147.

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FAQ

What are flaws of the Rule of 72>

There are a few key drawbacks to using the Rule of 72, including the fact that it’s mostly accurate only for a certain subset of investments, it’s only an estimation, and that unforeseen factors can cause the rate of return for an investment to change, rendering it useless.

Does the Rule of 72 apply to debt?

Yes, the Rule of 72 can apply to debt, and it can be used to calculate an estimate of how long it would take a debt balance to double if it’s not paid down or off.

Who created the Rule of 72?

Albert Einstein often gets credit, but Italian mathematician Luca Pacioli most likely invented, or introduced the Rule of 72 to the popular world in the late 1400s.

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