Do you want to watch your money grow quickly? If so, you should know about the Rule of 72.
It can help you double your money in 9 years. The Rule of 72 is a simple way to calculate the time it will take to double an investment with a fixed annual rate of return.
If you want to learn more about this rule and wealth accumulation, we can help! Here’s your guide to using the Rule of 72.
What Is the Rule of 72?
The Rule of 72 is a mathematical formula that helps your estimate the time it will take for an investment to double its value or lose its value by half. To use it, you take the number 72 and then divide it by the interest you earn on your investment each year.
This tells you the number of years that it will take to see that investment grow 100%. This formula can calculate how an investment may fall as well.
You can only apply the Rule of 72 to compound growth or decay. This means it only applies to investments earning compound interest rather than simple interest.
Simple interest involves earning interest on the principal you invest. Compound interest involves earning interest on accumulated interest, in addition to interest on the principal.
How Does It Work?
If you’re earning 8% interest annually on your investment, it takes approximately 9 years to double that investment. (72/8=9). If you’re earning 12% annually, it will take only 6 years to double your investment. (72/12=6).
This rule is only a rough estimate. It doesn’t consider compounding which can impact the time it takes for your investment to double in value. Compounding happens when the interest for the following period is earned on the original and the reinvested interest.
Compounding accelerates the growth of an investment. The Rule of 72 is helpful for projecting investment growth. For a more precise calculation, it’s better to use a compound interest calculator.
Three Estimates of the Rule of 72
The Rule of 72 is a helpful tool for estimating the following:
- How long it will take for an investment to double with a fixed annual rate
- The number of years it will take to double your investment
- How compounding affects the time it takes for an investment to double
Although the number 72 is a good number to use for these calculations in most situations, you can fiddle with the formula a bit. For very high-interest rates, 78 gives more accurate results.
For lower interest rates or interest compounding daily, 69 or 70 may be a better choice.
Investment Growth and the Rule of 72
Every investor hopes to see positive investment growth over time. The Rule of 72 is a simple way to project the growth of your investments.
This rule illustrates the beauty of compounding and how it helps you grow savings and build wealth. Our goal at Figuring Out Money is to share information about personal finance and wealth building through investing and savings.
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