The Rule of 72 is a mathematical approximation that helps you estimate the time it takes for an investment to double in value based on a given interest rate. It assumes that the interest rate remains constant over the investment period, which is a simplification but can provide a rough estimate.
How Do You Calculate the Rule of 72?
To use the Rule of 72, you divide the number 72 by the annual interest rate (expressed as a percentage) to determine the approximate number of years it will take for your investment to double.
Let’s take an example. Suppose you have an investment that earns an annual interest rate of 8%. To estimate how long it will take for your investment to double, you can divide 72 by 8:
Number of Years to Double = 72 / 8 = 9 years
According to the Rule of 72, with an 8% interest rate, it would take approximately 9 years for your investment to double in value.
Similarly, if you have a different interest rate, you can use the same formula. For instance, if the interest rate is 6%, you divide 72 by 6:
Number of Years to Double = 72 / 6 = 12 years
In this case, with a 6% interest rate, it would take around 12 years for your investment to double.
It’s important to note that the Rule of 72 is an approximation and does not take into account compounding, which can have a significant impact on investment growth. Also, keep in mind that interest rates can change over time, so the actual doubling time may vary. Nonetheless, the Rule of 72 provides a quick and easy way to estimate the time it takes for an investment to double based on a given interest rate.
Who Came Up With the Rule of 72?
The exact origin of the Rule of 72 is not attributed to a specific individual. It is believed to have been developed as a simple rule of thumb that has been passed down through generations and widely used in the field of finance.
The Rule of 72 is a rough approximation rather than a precise mathematical principle. Its simplicity and ease of use have made it popular among individuals, investors, and financial professionals as a quick method to estimate the time it takes for an investment to double.
While the originator of the rule remains unknown, it is often credited to be a mnemonic device that was derived from the mathematical constant “e” (approximately equal to 2.71828) used in compound interest calculations. The Rule of 72 serves as an approximation for the natural logarithm of 2, which is approximately 0.693. By using 72 as a divisor, it provides a close estimate of the doubling time for an investment.
Although the Rule of 72 is not derived from rigorous mathematical principles, its simplicity and ease of use have made it a popular tool for financial estimation and planning.