The rule of 72 is a useful mental model, apparently created by Albert Einstein, which helps understand growth rates and compounding.
Very simply, the rule states that if you divide the number 72 by an annual growth rate, the result will be a very close estimation to the number of years it takes for a particular variable to double.
For example, I wrote in an earlier blog post about Innscor revenue growing at 15% in the most recent year. According to the rule of 72, it will take less than 5 years for the revenue to double in value, which is remarkably quick.
I read somewhere that the UK economy was forecast to grow by just 0.3% in 2023, implying it will take 240 years to double in size. This compares with India, whose GDP was forecast to grow at above 7%, implying 10 years to double. In which country would you rather invest?
Conversely, you can also use the rule to estimate how long it takes for inflation to erode your savings. The UK inflation rate for 2022 reached 11%, implying it will take 6 and a half years for your savings to halve, which is a very scary prospect.
So whenever a growth or inflation rate is shown, the first thing to think about is rule of 72.