Rule of 72
Candlefocus EditorTo illustrate the Rule of 72, let's assume the rate of return of an investment is 8% per year. To calculate how long it will take to double the original amount of money invested, use this equation: 72/8 = 9 years. In other words, it will take 9 years for an investment with a consistent interest rate of 8% to double in value.
The rule is not completely precise however as the real time to double a value can vary depending on the interest rate. For example, a 6% rate of return necessitates 12 years to double an investment, whereas the same rate of return for a longer timeframe such as 10 years promises only a 73.4% doubling rate rather than the 100% that would be expected. Meanwhile, the Rule of 72 isn’t accurate for interest rates that are lower than 6%, or beyond 10%. In these cases, the Rule of 69, Rule of 70 or Rule of 73 is more precise.
Other than being used as a time estimator, the Rule of 72 can also be used as a rate estimator. This means that it can be used to calculate the rate of return needed for an investment to double within a given period of time. For example, if someone wanted to double the value of their investment in 5 years, the equation is 72/5, which equals 14.4%. Therefore, they would need to find an investment with an average rate of return of 14.4% in order to double the money in the given period of time.
Overall, the Rule of 72 provides an easy and accurate estimation of compounding interest rates and is a valuable tool for investors to utilize. Keeping the Rule of 72 in mind when examining investments can help them to predict the long-term effects of their investments as well as a return rate needed in order to reap the desired results. Despite being a general estimation tool, the Rule of 72 is a powerful assessment that can be used to make informed decisions about investments.