Definition Rule of 72. Description.
The Rule of 72 is a formula that is used in investing
to approximate the number of years it will take to double money at a given
(compound) interest rate. The calculation works by dividing 72 by the interest
percentage you will receive, giving the number of years.
Example: an investment gives an interest of 9%. The estimated
time in years (t) it will take to double your investment is 72 / 9 = 8 years.
The number of 69.3 or 70 is actually better, but the number
72 has as advantage it is easily divisible by many numbers: 2, 3, 4, 6, 8,
9, and 12 and works OK for most purposes.
The exact number can be derived from the Formula Future Value
= Present Value x ( 1 + Interest Rate )t
Suppose the money has doubled, this means that the Future
Value then equals 2 Present Value. We can now substititute this in the formula
and then cancel the factor Present Value.
This results in 2 = (1 + Interest Rate)t
or: t ≈ 0,693147 / Interest Rate
Rule of 72 Special Interest Group
Compare with: Time Value of Money | Net Present Value
| Discounted Cash Flow |
Internal Rate of Return |