# What Is Rule of 72 in Investment Explain with an Example

In by jonathan

This means that your initial investment of \$1,000 will be worth \$2,000 in about 7.8 years, assuming your earnings are compounded. If you invest \$10,000 instead, you will have \$20,000 in just under eight years. It also means that \$20,000 will double again in eight years assuming the same rate of growth – in other words, you`ll have \$40,000 in less than 16 years. Definition: The Rule of 72 is a mathematical method for estimating the number of years it will take for your money to double with compound interest. In other words, it`s a simplified way to determine how long your money needs to be invested to double at a certain interest rate. Of course, we could have used the equation to calculate each of these examples, but I thought the table would be simpler. We can also use a future value calculator or the real future value formula to check if these numbers are correct, but we don`t have to. This method works. This is a great shortcut because you can easily estimate the value of your investment in the future without the technical details of the actual future value equation. Depending on the interest rate, you can probably do the math in your head.

If the investment is composed on an ongoing basis rather than annually, Rule 69.3 provides a more accurate estimate. This formula is a great shortcut because the investment equation for full-length compound interest is long and complicated. You can use this simple rule of thumb as a basic estimate for investments. Here`s how it works. The number 72 is a good estimator in most situations and thanks to its easily divisible number for simple mathematics. It is best for interest rates or yields between 6% and 10%. Most investment accounts, including retirement accounts, brokerage accounts, index funds and mutual funds, fall within this return range. The rule of 72 is a funding shortcut to quickly estimate how long it will take for an investment to double. We can also perform the reverse calculation. Let`s say you have \$10,000 and you want to know what annual compound interest you need to double your money in 5 years.

If you go back to our chart, you can see that an interest rate of just over 14% is needed to reach your goal of \$20,000 over a 5-year period. But with another area, you might want to play a little – same formula, but different numbers to share. A simple rule of thumb is to add or subtract “1” from 72 for the three points that the interest rate deviates by 8% (the middle of the ideal range of the rule of 72). The calculation of the rule of 72 in Matlab requires a simple command of “years = 72 / return”, where the variable “return” is the return on investment and “years” is the result of the rule of 72. The rule of 72 is also used to determine how long it takes for the value of money to halve for a given rate of inflation. For example, if the inflation rate is 4%, an order “years = 72/inflation”, where variable inflation is defined as “inflation = 4”, gives 18 years. Rule 72 provides a useful shortcut. It is a simplified version of a logarithmic calculation that involves complex functions such as the natural logarithm of numbers. The rule applies to the exponential growth of an investment based on a composite return.

People love money, and they love to see it grow even more. A rough estimate of how long it takes to double your money will also help the average Joe or Jane compare different investment options. However, the mathematical calculations that project the appreciation of an investment can be complex for ordinary individuals without the help of logarithmic tables or a calculator, especially those involving compound interest. Just take the number 72 and divide it by the interest you earn each year on your investments to get the number of years it takes for your investments to grow by 100%. It can also be used to calculate how it can fall. The rule of 72 gives an estimate of how long it takes to double an investment. This is a fairly accurate measure, and this is even more true when lower interest rates than higher rates are used. It is used for situations of compound interest.

A simple interest rate doesn`t work very well with the rule of 72. To determine exactly how long it would take to double an investment with an 8% annual return, you would use the following equation: You can also use the rule of 72 to make decisions about risk versus reward. For example, if you have a low-risk investment that earns 2% interest, you can compare the doubling rate over 36 years to that of a high-risk investment that pays 10% and doubles in seven years. Many young adults who are just starting out choose high-risk investments because they have the opportunity to enjoy high returns for multiple doubling cycles. However, those approaching retirement are likely to choose to invest in low-risk accounts as they approach their target amount for retirement, as doubling is less important than investing in safer investments. You would start by calculating the future value of periodic returns, a calculation that helps anyone interested in calculating exponential growth or decay: note that after deriving the formula, we get 69.3, not 72. Although 69.3 is more accurate, it is not easily divisible. Therefore, Rule 72 is used for simplification.

The number 72 also provides more factors (2, 3, 4, 6, 12, 24…). For more accurate data on how your investments are likely to grow, use a compound interest calculator based on the full formula. To calculate the rule of 72, you just need to divide the number 72 by the return. You can use the following formula to calculate the doubling time in days, months, or years, depending on how the interest rate is expressed. For example, if you enter the annualized interest rate, you get the number of years it takes for your investments to double. Investors often use this calculation to estimate the difference between similar investments. They want their investments to increase so they can use the product to invest in more opportunities in the future. Keep in mind that it doesn`t have to be Wall Street investors or brokers. As you can see in the table above, the 69.3 rule provides more accurate results at lower interest rates.

However, when the interest rate rises, the 69.3 rule loses some of its prediction accuracy. For example, if you want to double \$1,000 in 3 years, you should earn an interest rate of 24% because 72/3 = 24. Remember that you can only apply this rule to growth or decomposition. In other words, you can only use it for investments that earn compound interest, not just interest. With simple interest, you only earn interest on the amount of capital you invest. Compound interest is “interest income”: it accumulates on accumulated interest in addition to the principal. The rule of 72 is reasonably precise for low yields. The table below compares the numbers in the rule of 72 and the actual number of years it takes for an investment to double. If we apply a little algebra, we can rearrange the rule in equation 72 to calculate how many years it takes to double your money at a certain interest rate compounded annually. You can even compare the increase in operating costs such as tuition and medical expenses to the interest rate. It is quite possible.

Try it yourself. You can use it for all kinds of interesting future value calculations. The time it takes for the value of an investment to double at a fixed annual return If it takes nine years to double a \$1,000 investment, the investment increases to \$2,000 in year 9, \$4,000 in year 9, \$4,000 in year 18, \$8,000 in year 27, and so on. In finance, the Rule of 72 is a formula that estimates the time it takes for the value of an investment to double and produce a fixed annual return. The rule is a shortcut or calculation on the back of the envelope to determine how long it takes to double the value of an investment. The simple calculation divides 72 by the annual interest rate. Here is an example of a table of how a rules calculator works 72. As you can see, the first column represents the annual investment rate, which is completed at the end of each year. The second column shows the number of years it will take for the value of the investment to double. The third column is always 72 because that is how the formula works. The investment ratio multiplied by the number of years is always seventy-two. In fact, the investment would take only 10.24 years to double.

Notice that the formula uses the symbol “approximately equal” (≈) instead of the regular symbol “same” (=). That`s because this formula provides an estimate rather than an exact amount, and it`s more accurate when used for investments that get a typical rate of 6% to 10%. For example, an investor who invests \$1,000 at an interest rate of 4% per year will double their money in about 18 years.