Legal Definitions - rule of 72

The rule of 72 is a quick estimation method used to determine how many years it will take for an investment to double in value. This is calculated by dividing the number 72 by the annual compound interest rate.

The Rule of 72 is a simple mathematical shortcut used to estimate how long it will take for an investment to double in value, given a fixed annual compound interest rate. It provides a quick approximation by dividing the number 72 by the annual interest rate.

Here are some examples illustrating how the Rule of 72 works:

• Personal Retirement Planning:

  Imagine an individual is investing in a diversified portfolio that historically yields an average annual return of 9%. To quickly estimate how long it would take for their initial investment to double, they can apply the Rule of 72: 72 divided by 9 equals 8. This suggests that, at a 9% compound interest rate, their money would approximately double every 8 years. This helps them project their financial growth without complex calculations.

• Evaluating Business Growth Opportunities:

  A small business owner is considering investing in a new product line that is projected to generate an average annual return of 12% on the initial capital. To understand the timeline for recouping and doubling their investment, they use the Rule of 72: 72 divided by 12 equals 6. This indicates that if the product line performs as expected, the initial investment in that venture would approximately double in 6 years, providing a useful benchmark for their strategic planning.

• Comparing Savings Account Options:

  A consumer is comparing two different high-yield savings accounts. Account A offers a 3% annual interest rate, while Account B offers a 4% annual interest rate. To quickly grasp the difference in growth potential, they can use the Rule of 72. For Account A: 72 divided by 3 equals 24 years to double. For Account B: 72 divided by 4 equals 18 years to double. This comparison clearly illustrates that Account B, despite only a 1% higher rate, would allow their money to double significantly faster, helping them make an informed choice.