Rule of 72
The rule of 72 is a nifty, short-hand way of estimating how many years it will take a given amount of money to double at a specific interest rate. Simply take 72 and divide by the interest rate.
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Expanded Definition
Using this rule, one can figure out what annual return rate must be earned in order to double one's money within a certain time frame. For instance:
- 7 years: 72 / 7 = 10%, or about what the S&P 500 has returned, on average.
- 6 years: 72 / 6 = 12%.
- 5 years: 72 / 5 = 14.4% or about 15% (easier to remember than "14.4%").
You can use the rule of seventy-two by using interest rates or years. e.g. using the previous examples:
- 10% annual return: 72 / 10 = 7.2 years
- 12% annual return: 72 / 12 = 6 years
- 15% annual return: 72 / 15 = 4.8 years
Thus it a very versatile and fast arithmetic tool indeed.
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