# What Is The Rule Of 72 And How Does It Relate To Investing?

What Is The Rule Of 72 And How Does It Relate To Investing? – If the money in the account that is compounding is paying compound interest, Rule 72 is a quick way to estimate the time it will take for the investment to double in value.

Rule 72 says that if a lump sum is invested with a periodic discount rate (i), then the number of periods (n) takes to double the value of the investment given by the rule of formula 72;

## What Is The Rule Of 72 And How Does It Relate To Investing?

It is important to note that the discount rate (i) is for each period and the formula is entered as a number, not a percentage, that is 10% is entered in the formula 72 as 10 .

## The Rule Of 72: Definition, Usefulness, And How To Use It

If the lump sum is invested today with an interest rate of 10% per period, the number of periods for the investment can be doubled, using the following Rule of 72 formula:

The price periods can be different, while the discount rate is indicated for each period. For example, if a large investment account is paying 7% per year, Rule 72 estimates the number of years for the investment to double as follows:

Rule 72 is a rough estimate, the time it takes to place a double, given the formula for the number of pieces of the sum of the periods.

In this special case, the value of the total mass invested at the discount rate (i) doubles after several periods (n), therefore the future value (FV) must be twice the present value (PV) and FV/PV = 2; therefore the aforesaid formula is simplified as follows:

## What Is The Rule Of 72?

If the number of the discount rate is 7% (as it is in the example above), the sum of the periods formula gives the number of years, as follows, it will be double invested;

In this case, it takes 10.24 years for the investment to double, compared to the Rule 72 estimate of 10.29 years.

Generally, the Rule of 72 becomes less accurate at the lowest discount rates, gives good estimates between 6% and 12%, and gradually becomes less accurate again as the discount rates increase.

For example, the discount rate is 0.25%, the rule of 72 gives a value of n for 288 periods, while the correct answer using the formula for the number of periods is 277.61 periods. Again, if the numerical value is 75%, the rule of 72 gives n for 0.96 periods, where the correct answer is 1.24 periods.

Rule 72 usually calculates the number of periods it takes to double an investment, but by changing the formula, the doubling rate can be estimated for the double ratio requirements using known periods.

Let’s say, for example, that an investor wanted to double the price of an investment in four years, in which case the profits (return on investment capital) should be estimated as follows:

An annual return of approximately 18 percent doubles the value of the investment in four years, while the present value is 18.92 percent given by the mass discount formula.

Rule 72 is useful for calculating the approximate periods or discount rate required to double the value of an investment. It should be used with caution at very low or high discount rates, but it provides a useful way to check the value of money.

### Compounding Is The 8th Wonder Of The World Said Einstein

BOOKKEEPING Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for over 25 years and has built financial models for all types of industries. He worked as a financial controller or supervisor of both small and medium-sized companies and managed his own small team. He was a director and auditor at Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University. The Rule of 72 formula is a great way to show how your compounding investment can grow.

I firmly believe that everyone should take advantage of their power to increase their wealth. Even if it’s \$25 a month.

One way to quickly demonstrate this power is to use the Rule of 72 when investing in your portfolio.

Personally, I use it every month when I analyze my portfolio and it helps me stay on track with our investment goals.

#### A Technical Investigation Into The Rule Of 72

Rule 72 is a simple quick calculator that can help estimate how many years it will take for an investment to double.

Of course, no one knows the future rate of return… so you will have a true estimate.

Many investors use this formula to calculate how long it will take for their investment to double at a given rate of return.

He, however, used the evil in dividing our portfolio. I want to calculate how long it will take our dividend income to double…using our average growth rate.

## The Rule Of 72

Important to note – this calculator takes into account compound interest…which allows you to double your investment fairly quickly.

This estimate also works best with an annual interest rate of 6-10%. Numbers vary slightly above or below these rates.

The formula for the Rule of 72 is very simple…you divide the percentage of income by 72 for the number of years.

Remember, the number of years indicates how long it will take for the investment to double…if the average rate of return is correct.

## Compound Interest: The Rule Of 72

You can have an average 8% return investment in an affordable index fund in case of retirement.

An avid investor looking to build retirement savings…be curious as to how long it will take for an investment to double. This formula assumes that you are no longer adding new money to the investment…which I hope is not the case.

If you had a Year 1 balance in your retirement account of \$100,000, the investment would grow to \$200,000 over 9 years at an 8% return.

As I said, rule 72 of the formula is easy to understand. I want to see the actual numbers… Although I’m a geek, I know.

### Rule Of 72 Helps You Project Your Investment’s Value Over Time

We start with a balance of \$100,000 in our retirement account and earn an annual income of 8% per year. So…this could never happen in real life, but this is just a general rule of thumb.

Our investment growth looks pretty much like this until year 9, when we (almost) double our first investment –

Watch your portfolio grow over 9 years without a new loan! Yes… this will add interest that will work for you.

Also note that we won’t actually hit \$200,000 in year 9…but rather later (which I pointed out in year 10).

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Remember that the Rule of 72 is not exact, but an easy way to roughly estimate how long it will take to invest in a double.

Now your twin investment is great…but I’m a dividend investor trying to build cash flow. Does rule 72 also apply to dividend income?

The Rule of 72 works best for calculating how long it will take for dividend income to double.

Every month we use it for fun to track where we are in terms of future dividend income goals.

## Rule Of 72: Find Out When Your Investment Will Double

To complete my calculations, I need to find a few things – (1) our initial dividend yield and our average annual growth rate.

After ten years of investing in dividend stocks… I am very happy that we can increase our dividend income by 9% annually… but I hope for more.

Let’s look at a real-life example of how this works. Let’s start with the actual dividend income we earned in 2020…which was \$3,886.97.

And it’s just like that… by year 8 (or 2028) our dividend income has doubled (or nearly)!

## What Is The Finance Rule Of 72?

In reality…we’ve multiplied the dividend yield by over 9%, so the numbers must be much higher.

The Rule of 72 can be used as a fun way to quickly calculate how compound interest will grow your portfolio… or in some cases, your dividend income.

How fast your money can grow Since there is no guarantee of future growth, we can only make a best guess.

We like to use the Rule of 72 to help estimate our future dividend income at the end of each month using our forward interest rate. It helps keep me motivated and on track with our long-term investment goals.

#### Rule Of 72 At 28%

Do you use the Rule of 72 in any of the aforementioned investments? Or are there other formulas or calculations you want to use to estimate your growth and dividend income portfolio? Rule 72