Question

What is the rule of 72? Please provide a simplified overview of how this rule of thumb works over a wide range of interest rates. (For example, this works really well for interest rates between a to b, is only so so when interest rates vary from c to d, and does not work well at all when we apply interest rates in the range of e to f). Note: You should describe the first calculation only here, you do not need to describe the assumptions for every additional calculation where you are changing just one variable.

Thank you!

Answer 1

The Rule of 72 is a quick, useful formula that is popularly used to estimate the number of years required to double the invested money at a given annual rate of return.While calculators and spreadsheet programs like excel sheets have inbuilt functions to accurately calculate the precise time required to double the invested money, the Rule of 72 comes in handy for mental calculations to quickly gauge an approximate value. Alternatively, it can compute the annual rate of compounded return from an investment given how many years it will take to double the investment.

If an investment scheme promises an 8% annual compounded rate of return, it will take approximately (72 / 8) = 9 years to double the invested money. Note that a compound annual return of 8% is plugged into this equation as 8, and not 0.08, giving a result of nine years (and not 900).

The formula has emerged as a simplified version of the original logarithmic calculation that involves complex functions like taking the natural log of numbers. The rule applies to the exponential growth of an investment based on a compounded rate of return.