The Rule of 72 is a quick way to estimate how long it will take for your investment to double in value. It works by dividing the number 72 by the annual interest rate or rate of return of your investment. The result is the approximate number of years it will take for your investment to double in value.
For example, if you have an investment with an annual interest rate of 8%, the Rule of 72 tells you that it will take approximately 9 years for your investment to double (72 ÷ 8 = 9). Similarly, if your investment has an annual return of 6%, it will take approximately 12 years to double (72 ÷ 6 = 12).
Why is the Rule of 72 important?
The Rule of 72 is an important tool because it helps you understand the power of compounding. Compounding is when the interest or return on your investment is reinvested to earn even more interest or return. Over time, this can lead to significant growth in the value of your investment.
For example, if you invest $10,000 at an annual interest rate of 8%, your investment will be worth approximately $20,000 in 9 years when it doubles. However, if you leave your investment for another 9 years, it will double again and be worth approximately $40,000. This is the power of compounding, and that’s why starting to invest early and consistently is so important.
The Rule of 72 is a simple and useful tool for estimating how long it will take for your investment to double in value. It helps you understand the power of compounding and the time value of money, which are both important concepts for successful investing.
While the Rule of 72 is not an exact calculation, it provides a close approximation that can be useful for planning purposes. By using the Rule of 72, you can make informed investment decisions and better understand the potential returns on your investments.