Question

• What is Rule of 72?
• How does this implementation become a rule? In which cases is it applicable?
• What are its advantegaes and disadvantages?
• Any comments of your own in order to improve this rule ?

Answer 1

The Rule of 72 can be defined as saving and investment approach to figure out the number of years required doubling the investment given a fixed rate of interest annually. The formula for rule of 72 is dividing 72 with annual interest rate for estimating the doubling of value of an investment. It's implementation became a rule as it is believed that no force in the universe more powerful in comparison to the compound interest; and implementation became a rule it can estimate the time to double if we know the growth rate

Advantages:

-- The rule helps in quickly deciding between two financial instruments to invest in.

-- It provides a rough estimation on how much return would he be seeking for or how long a person should invest.

-- The rule assists in future planning such as grand vacation, college funding, and retirement funding, and/or even house/car fund.

Disadvantages:

-- In real world the investments move volatile thus the assumption of rate of return to be annually fixed is unrealistic

-- It provides only estimation and not the accurate figures

The Rule of 72 is accurate reasonably when the rates of return are low. Moreover it is a quick-and-easy approach to determine how many years it will be needed to double an investment. However there are some slight inaccuracies while applying this rule. Thus should be used when the rates of return is low. It can be improved with the act of the knowledge of the investor as it provides only an estimate