Legal Definitions - rule of 72

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.