The Rule of 72: what is it?
The Rule of 72 is a basic method for estimating how long it takes for an investment to double in value, provided it remains untouched.
The Rule of 72 is a compounding formula to estimate an investment's future value.
It involves dividing 72 by the annual rate of return to approximate the years it will take for the investment to grow twofold.
The Rule of 69.3 is a corollary of the Rule of 72 but is only accurate when calculating with rates of return between 5% and 10%.
If you want a more personalized, tailored strategy, it’s best to consult with a financial advisor who can offer customized advice based on individual circumstances.
What is the Rule of 72?
The Rule of 72 is a problem-solving method that provides a quick mental calculation for investors to estimate the future value of their investments.
Some sources believe Albert Einstein formulated the rule, along with the statement, "There is no force in the universe more powerful than compound interest." However, Italian mathematician Luca Pacioli mentioned the helpful Rule 72 formula in his book "Summa de Arithmetica" in 1494.
The rule became popular over time, given its simplicity and practicality, making it a valuable tool for investors wanting to quickly assess their assets' potential growth. While it's not an exact science, the Rule of 72 serves as a helpful guideline for individuals who want to gauge the impact of interest rates on their different investments easily and quickly.
What is the Rule of 72 formula?
The Rule of 72 formula is straightforward:
Years to double = 72 / Annual rate of return
If an investor wants to compare investment opportunities, Rule 72 quickly approximates which investment will double sooner or provide a more favorable return.
Let's look at some examples:
Investment opportunity 1
Description: $65,000 at 9% rate of return
Rule of 72 application: Years to double = 72/9 = 8 years
Outcome: In 8 years, the investor's investment will double to $130,000.
Investment opportunity 2
Description: $75,000 at 8% rate of return
Rule of 72 application: Years to double = 72/8 = 9 years
Outcome: In 9 years, the investor's investment will double to $150,000.
Investors interested in making informed decisions about their financial future must understand this formula.
However, some people may find calculations challenging or prefer a more personalized approach. In such cases, it is highly recommended to consult with a financial advisor.
Financial advisors possess the expertise to customize advice based on individual circumstances, ensuring a more accurate and tailored strategy.
Are there variations of the Rule of 72?
As with Rule 72, investors can use other compounding formulae to ascertain investment returns over specific periods.
A corollary of Rule 72 is Rule 69.3, which is more accurate in assessing how long an investment will take to double, but only when the annual rate of return is between 5% and 10%.
Alternatively, to calculate how long it would take an investment to triple (3X) in value, you can use the Rule of 114, which looks like this:
Years to triple = 114/Annual rate of return
To calculate how long it would take an investment to quadruple (4X) in value, you would use the Rule of 144, i.e.,
Years to quadruple = 144/Annual rate of return
How to effectively use a Rule of 72 calculator
As technology advances, online calculators have increased in popularity amongst investors.
For instance, our investment growth calculator allows investors to calculate how much their investments could grow over a period.
The Rule of 72 calculator provides a simple and effective way to estimate investment doubling time. All users need to do is input the annual rate of return, and the calculator will take care of the rest. This saves time and minimizes human error risk in manual calculations.
For those new to online calculators or hesitant about using financial tools, many tutorials and guides are available online. Using these calculators effectively can improve financial literacy and enable individuals to make more informed investment decisions.
What are the practical applications of the Rule 72 in investing?
The Rule of 72 is a helpful concept that finds practical applications in various investment strategies. Its primary use is to estimate how long it would take for an investment to double in value.
Still, it can also be used as a benchmark for quick assessments of potential opportunities. This makes it a valuable tool for evaluating a new venture's profitability or assessing a long-term investment's viability.
Rule of 72 is also crucial for retirement planning.
Understanding how investments grow over time can help people make informed decisions about their savings and withdrawal strategies. However, it's essential to know that the Rule of 72 has limitations. Market conditions, economic fluctuations, and unforeseen events can impact the accuracy of predictions.
Therefore, it's essential to seek expert financial advice when navigating the complexities of investment planning.
Seek expert financial advice
The Rule of 72 is a practical tool for estimating investment doubling time, but it's only a guideline. Market conditions can change quickly, so seeking expert financial advice is essential to develop a customized strategy.
Financial advisors bring knowledge and experience to investments, retirement, and wealth management. While the Rule of 72 is a good starting point, a financial advisor can provide personalized guidance for financial success.
Let Unbiased match you with the right SEC-regulated financial advisor for your needs.
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