What Is the Rule Of 72 How Is It Calculated?
The Rule of 72 is a very common practice in the financial market to compute how much time it takes to duplicate an investment. This formula was created before the 14th century to quickly calculate the compound interest. But it still works fine in the 21st century because it’s very easy to calculate this way. However, it doesn’t tell you the exact figure of the time, it only gives you a very good estimate. So now we will discuss further to understand what is the rule of 72 how is it calculated.
Rule Of 72 Formula
So, the formula which is used to determine the time of doubling the investment is called the rule of 72 formula. It is done by dividing 72 by the annual rate of return, this way the investors get an overall estimate about the time which will take to duplicate their investment. For example, if you invest a 1000$ in a fixed deposit which has a fixed interest rate of 8% then we will calculate this by 72/Interest Rate = Years to double the investment. And, in here 72/8 = 9, so it will take nearly 9 years to duplicate the investment. But in reality, you will see that the actual time is slightly different than this. To see the actual value you have to apply this formula: 2000=1000*(1+8/100)n.
The rule of 72 is very suitable to determine the time of an investment for the low-interest rate investments. But as the interest rate rises the difference between the calculated time and actual time becomes higher. So, it will apply better for the low-interest rate equations.
Impact of Rule Of 72
The rule of 72 is the fastest and useful way to determine how long it will take to double anything with a fixed interest rate. Which is why it’s very important to know about what is the rule of 72. Plus, most of the people can’t apply the actual compound interest formula in their head that can solve this which makes it even more important. You can also search this topic in investopedia for better understanding.