Term of the Day: Rule of 72

The rule of 72 is a shortcut to estimate the number of years required to double your money at a given annual rate of return. The rule states that you divide the rate, expressed as percentage, into 72:
 
Years required to double your money = 72/compound annual interest rate
 
Example: 72/8 (8% annual interest rate) = 9 years to double your money
 
The rule can also be used to find the amount of time it takes for money's value to halve due to inflation. If inflation is 6%, then a given amount of money will be worth half as much in 72/6 = 12 years.
 
Adjusting For Higher Rates
The rule of 72 is reasonably accurate for interest rates between 6%-10%. When dealing with outside the range, the rule can be adjusted by adding or subtracting 1 from 72 for every 3 points the interest rate diverges from 8%. Example: 11%, 73; 14%, 74; 5%, 71.
 
Adjusting For Continuous Compounding
For daily or continuous compounding, using 69.3 gives a more accurate result. Some people adjust it to 69 or 70 for simplicity.
 
Example:
 


Source: Investopedia


 

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