When it comes to financing, the Rule of 72 is a quick way to estimate how long an investment will take to double, given a fixed annual rate of return. The rule is useful for comparing the doubling time of different investments. It is also a good way to see whether an investment's return is meeting your expectations.
The formula is simple and is based on the idea that money grows at a compound interest rate. Compound interest is when you earn interest not only on your original investment but also on the accumulated interest from previous periods.
What is the Rule of 72
The Rule of 72 is a simple way to determine how long it will take for an investment to double in value. The rule states that you simply divide the number 72 by the interest rate you are earning on your investment, and the result is the number of years it will take for your money to double.
It's very important to remember that the Rule of 72 is only a guideline and not a foolproof method for predicting the future. Many factors can affect how long it will take for your money to double, including inflation, fees, and changes in the underlying investment.
That being said, the Rule of 72 is still a helpful tool for understanding the power of compound interest. By knowing how long it will take for your money to double, you can get a better sense of how quickly your investment will grow.
The formula of the Rule of 72
As we said, the formula of the Rule of 72 is very simple. You just divide the number 72 by the expected annual rate of return on your investment. The result will be the approximate amount of time it would take for your money to double.
The formula of the Rule of 72 is as follows,
Doubling year (expected years to double your money) = 72 / Annual interest rate
Doubling year: The number of years it would take for your money to double
Annual interest rate: The expected annual rate of return on your investment
Examples of Rule of 72
Let's say you're planning to invest $10,000 in a savings account that pays 2% interest per year. How long will it take for your investment to double using the Rule of 72?
$10,000 x 2% = $200
72 / 2 = 36 years
It would take approximately 36 years for your investment to double to $20,000.
Now let's say you want to know how long it will take to double your money if you're earning 6% interest per year.
72 / 6 = 12 years
It would take approximately 12 years for your money to double at a 6% annual rate of return.
The Rule of 72 is a simple way to estimate how long an investment will take to double, given a fixed annual rate of return. The rule is useful for comparing the doubling time of different investments. It is also a good way to see whether an investment's return is meeting your expectations.
Conclusion
The rule of 72 is a helpful tool that can be used to estimate how long it will take to double an investment. It is also useful for calculating the required rate of return on investment to achieve a financial goal. The formula is simple, all you have to do is divide 72 by the expected annual rate of return.
Article Source Here: Rule of 72 in Finance and Investing: Definition, Calculation, Formula, Example, Equation
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