Why is 72 in the Rule of 72?

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By Nick

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Want to know how long it will take for your investments to double? The Rule of 72 is a simple formula that can help. Divide 72 by the annual rate of return to get an approximation of the number of years it will take for your investment to double in value. The value 72 is a convenient choice because it has many small divisors. However, it should only be used as an estimate. Keep in mind that the Rule of 72 has its limitations.

The Rule of 72: Understanding the Magic Number

Have you ever heard of the Rule of 72? It’s a simple mathematical formula that can help you estimate how long it will take for your investments to double. The rule states that if you divide 72 by the annual rate of return, you will get an approximation of the number of years it will take for your investment to double in value. But why is 72 the magic number? Let’s dive deeper into the value 72 and its significance in the Rule of 72.

The Convenience of 72

The value 72 is a convenient choice of numerator because it has many small divisors: 1, 2, 3, 4, 6, 8, 9, and 12. This means that it is easy to find a rate of return that will produce a whole number when divided into 72. For example, if you have a rate of return of 8%, it will take approximately 9 years for your investment to double (72 divided by 8 equals 9). This makes it a useful tool for quick calculations and estimates.

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Approximation for Compounding

The Rule of 72 provides a good approximation for annual compounding, and for compounding at typical rates (from 6% to 10%). This means that if you have an investment that is compounding annually at a rate of 8%, the Rule of 72 will give you a rough estimate of when your investment will double. Of course, this is just an estimate, and actual results may vary based on a number of factors.

The Limitations of the Rule of 72

While the Rule of 72 can be a useful tool for estimating investment growth, it does have its limitations. For example, it assumes that your investment will compound at a constant rate, which may not always be the case. It also does not take into account factors such as inflation, taxes, and fees, which can all have an impact on your investment returns.

Using the Rule of 72

If you want to use the Rule of 72 to estimate how long it will take for your investments to double, simply divide 72 by the annual rate of return. For example, if you have an investment that is earning 10% per year, it will take approximately 7.2 years for your investment to double (72 divided by 10 equals 7.2). Keep in mind that this is just an estimate, and actual results may vary.

In Conclusion

The value 72 is a convenient choice of numerator in the Rule of 72 because it has many small divisors and provides a good approximation for annual compounding and typical rates. While it has its limitations, the Rule of 72 can be a useful tool for estimating investment growth and planning for the future. Remember to always consider all factors that may impact your investment returns and seek professional advice before making any investment decisions.

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