How to Use the Rule of 72 Formula
In finance, rule of 72 is an important approximation rule that is used to quickly estimate the number of years it will take for an investment double in value at a given interest rate.
According to this rule, the interest rate multiplied by the number of years it will take for the investment to double is equal to 72 approximately. The rule of 72 considers exponential growth, i.e., continuous compounding.
Let’s see how it can be used in different scenarios.
Estimate the time it takes to double the investment
Let’s say you have $10,000 to invest. If you invest this money in a financial asset that provides 10% interest, then how much time will it take to double this investment. If the interest rate is represented by r and time by t, then:
r*t = 72
In our case r is 10%, so t = 72/10 = 7.2 years
According to the rule of 72, our investment of $10,000 will take 7.2 years to become $20,000 if invested at an interest rate of 10%.
To test this formula, let’s use the exponential growth formula to see how much time it will actually take to reach $20,000.
10,000*(1+0.10)^t = 20,000
This content is for paid members only.
Join our membership for lifelong unlimited access to all our data science learning content and resources.