What Is The Rule Of 72?
What is the Rule of 72?
The Rule of 72 is a simple financial formula that tells you how long it will take for an investment to double in value, based on its rate of return. The formula is simple – divide 72 by the rate of return, and you will get the number of years it will take for your investment to double in value. For example, if you invest in something that returns 8% per year, it will take approximately 9 years (72/8) for your money to double.
Why is 72 Used in the Rule of 72?
The use of the number 72 in this formula is not arbitrary. The number 72 is derived from the rule of 72 in compounding. Compounding is the process of earning interest on your interest. When you invest, your money earns interest. That interest then earns interest, and so on. This is how your money can grow exponentially over time. The rule of 72 explains how long it will take for your money to double in value when compounded.
The rule of 72 states that your money will double in value in a certain number of years. That number of years is equal to 72 divided by the rate of return. So, if your rate of return is 8%, your money will double in 9 years (72/8). This is why the Rule of 72 uses the number 72 – it is derived from the rule of 72 in compounding.
How Can I Use the Rule of 72?
The Rule of 72 is a useful tool for financial planning. It can help you determine how long it will take for your investments to double in value. It can also be used to compare different investments and decide which is the best for your particular situation. Knowing how long it will take for your money to double can help you make informed decisions when it comes to investing.
Conclusion
The Rule of 72 is a simple formula that can help you plan for your financial future. By understanding the rule of 72 and how it relates to compounding, you can determine how long it will take for your investments to double in value. This knowledge can be used to make smart investing decisions and ensure that your money is growing as quickly as possible.
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