Written by What is the Rule of 72?
- Definition: 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.
- Formula: To calculate the time it will take for an investment to double, divide 72 by the annual rate of return. For example, with a 6% return, 72 / 6 = 12 years to double your investment.
- Uses: The Rule of 72 is useful for understanding compound interest and evaluating the potential growth of an investment over time.
How to Use the Rule of 72
- Estimate Investment Growth: You can use the Rule of 72 to quickly estimate how long it will take your investment to grow. This can help you determine if an investment meets your financial goals.
- Compare Investment Options: Use the Rule of 72 to compare different investment options. If one investment offers a 6% return and another offers an 8% return, the latter will double your money faster (9 years vs. 12 years).
Limitations of the Rule of 72
- Assumptions: The Rule of 72 assumes a constant rate of return, which is not always realistic in volatile markets.
- Interest Compounding: The Rule of 72 works best for investments with compounded interest. If your investment grows in a different way, the rule may not be as accurate.
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