What is meant by the Rule of 72

The “Rule of 72” may be a simple source to actuate the accurate or assumed time taken when an investment will yield double, accustomed with a standard annual interest rate. Investors can get an approximate calculation of years in which an investment will yield double by simply dividing 72 by the annual interest rate.

Assume that if you have made an investment of $1 for 10%, according to the “Rule of 72” it will take about 7.2 years in the duplication. The formula will be (72/10=7.2 years). Means after 7.2 years your investment will become equal to $2. However, a 10% investment will yield 7.3 years for making it duplicate in real (1.10^7.3=2).

The “Rule of 72” is found adequately accurate while coping with low return rates. The following chart is comprised of the numbers yielded by the “Rule of 72” and the real numbers of years that an investment has taken in duplication.

  Rate of Return Rule of 72 Actual # of Years Difference (#) of Years
2% 36.0 35 1.0
3% 24.0 23.45 0.6
5% 14.4 14.21 0.2
7% 10.3 10.24 0.0
9% 8.0 8.04 0.0
12% 6.0 6.12 0.1
25% 2.9 3.11 0.2
50% 1.4 1.71 0.3
72% 1.0 1.28 0.3
100% 0.7 1 0.3

 It is also notable that “Rule of 72” is quick however is becoming less accurate with the rise of rate of return. Therefore, it is ameliorated to opt for future value of money in case of higher return rates. The formula for the Future value of money will permits you to calculate more precisely the numbers of years algebraically.B

Conclusion
The “Rule of 72” is not fair enough but is still recommended for those investors who want to make estimations about the duplication of their invested amount. There is a very slight difference between actual and calculated estimates.

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