The Rule of 72 is a quick calculation to estimate how long it will take for your investment to double in value, given a fixed annual interest rate. It's a useful tool for understanding the power of compound interest.
How to Use the Rule of 72
The formula is simple: Divide 72 by the annual interest rate (as a percentage). The result is the approximate number of years it takes for your money to double.
Example:
- If your investment earns 6% annually, it will take approximately 72 / 6 = 12 years to double.
Accuracy and Limitations
The Rule of 72 provides a close approximation, but it's not perfectly accurate. Its accuracy diminishes as the interest rate increases. For more precise calculations, you would need to use more complex financial formulas. The Rule of 72 is most accurate for interest rates between 6% and 10%. For higher or lower rates, slightly adjusted rules (like the Rule of 69.3 for continuous compounding) may offer better accuracy.
Applications Beyond Investments
While primarily used for investment growth, the Rule of 72 can also be applied to understand:
- Inflation: Estimate how long it takes for the purchasing power of money to halve at a given inflation rate.
- Debt: Estimate how long it takes for debt to double at a given interest rate (assuming no payments are made).
Resources for Further Learning
For more in-depth information on the Rule of 72 and related concepts, consult these resources:
