Are you wondering how long it will take your money to double at your current savings rate? The Rule of 72 is a simple way to figure it out.
In this article, we’ll define the Rule of 72, explain the formula and how to calculate it, and provide some real-world examples.
Without further ado, let’s get started!
What is the Rule of 72?
The Rule of 72 is a simple way to estimate how long it will take for an investment to double in value. The rule says that you divide 72 by the interest rate you’re earning on your investment, and the answer tells you how many years it will take for your money to double.
For example, if you’re earning a 10% annual return on your investment, it will take approximately 7.2 years (72 divided by 10) for your money to double.
The Formula for the Rule of 72
The Rule of 72 is based on the simple idea that money grows at a fixed rate. So, if you know the interest rate you’re earning on your investment, you can use that information to estimate how long it will take for your money to grow.
But what if you don’t know the interest rate? No problem! The rule can also be written as a formula:
A = 72 / r
Where A is the number of years it will take for your investment to double, and r is the interest rate you’re earning on your investment.
For example, if you’re earning an 8% return on your investment, the calculation would look like this:
A = 72 / 8
A = 9 years
How to Calculate the Rule of 72
Now that you know the definition and formula for the Rule of 72, let’s look at how to calculate it.
First, you need to determine the interest rate you’re earning on your investment. This can be found in your investment statement, or you can ask your financial advisor.
Once you have the interest rate, simply divide 72 by the interest rate to get the number of years it will take for your money to double.
For example, if you’re earning a 6% return on your investment, the calculation would look like this:
72 / 6 = 12 years
It would take 12 years for your money to double at a 6% interest rate.
Rule of 72 Example
Let’s say you have $10,000 to invest and you’re earning a 7% annual return on your investment. How long will it take for your investment to grow to $20,000?
To calculate this, we can use the Rule of 72:
72 / 7 = 10.29 years
It will take approximately 10 years for your investment to double in value.
Limitations of the Rule of 72
The Rule of 72 is a simple and quick way to estimate the length of time it will take for an investment to grow. However, there are a few limitations to keep in mind:
First, the Rule of 72 only applies to investments that earn a fixed rate of return. This means that it’s not accurate for investments that fluctuate in value, such as stocks.
Second, the Rule of 72 is only an estimate. In reality, your investment may take longer or shorter to double than the estimate suggests.
Finally, the Rule of 72 doesn’t take into account the effects of inflation. This means that, while your money may double in value over the course of several years, it may not be worth as much in purchasing power when it does.
Despite these limitations, the Rule of 72 is still a helpful tool for estimating how long it will take for an investment to grow.
When to Use the Rule of 72
The Rule of 72 can be used in a variety of situations, such as:
– Estimating how long it will take to double your money
– Determining the interest rate you need to earn to reach your financial goals
– Deciding whether to invest in a particular stock or mutual fund
– Comparing the potential returns of different investments
No matter what your goal is, the Rule of 72 can help you estimate how long it will take t
The Rule of 72 is a mathematical formula that was first published in 1892 by French mathematician Louis Bachelier.
Rule of 72 FAQs.
Who Came Up With the Rule of 72?
The Rule of 72 was first published in 1892 by French mathematician Louis Bachelier.
How Accurate Is the Rule of 72?
The Rule of 72 is only an estimate. In reality, your investment may take longer or shorter to double than the estimate suggests.
What Is the Difference Between the Rule of 72 and the Rule of 73?
The Rule of 73 is similar to the Rule of 72, but it’s more accurate. To use the Rule of 73, simply divide 73 by the interest rate.
For example, if you’re earning a 6% return on your investment, the calculation would look like this:
73 / 6 = 12.17 years
It would take approximately 12 years for your money to double at a 6% interest rate.
While the Rule of 73 is more accurate than the Rule of 72, it’s still only an estimate. In reality, your investment may take longer or shorter to double than the estimate suggests.
Conclusion
The Rule of 72 is a simple way to estimate how long it will take for an investment to grow. By dividing 72 by the interest rate you’re earning, you can get a rough estimate of how many years it will take for your money to double.
While the Rule of 72 is a quick and easy way to estimate investment growth, it’s important to remember that it’s just an estimate. Your actual results may vary depending on a number of factors, including inflation and fees.
If you’re looking for a more precise estimate of your investment growth, consider using a financial calculator or speaking to a financial advisor.
Originally posted 2022-10-17 23:38:05.
