The Rule of 72 is a simple financial tool that estimates how long it will take for an investment to double based on the annual interest rate.
The Rule of 72 allows you to estimate the doubling time of your investment by dividing 72 by the annual interest rate.
It assumes compound interest, where earnings are reinvested and added to the principal, accelerating returns over time.
The rule is most accurate for interest rates between 5% and 10%, with 8% being the most precise. The further you deviate from these rates, the less accurate the estimate becomes.
It can guide decision-making when circumstances change, such as fluctuating interest rates or inflation, helping you adapt your investment strategy.
It assists in comparing different investment options, empowering you to make informed choices and set realistic expectations.
Using the Rule of 72 can help you visualize how your money grows over time, whether for retirement or other financial goals.
It also highlights the urgency of paying off debt by showing how quickly it can double, motivating you to take action.
Remember that the Rule of 72 is an estimation tool, not an exact calculation, and works best for fixed interest rates between 5% and 10%.