Learn about the Rule of 72 and its use in determining when your money or investment will double. Explore compound interest and the effects of different interest rates.
The Rule of 72 | Understand and Calculate
The Rule of 72
Here, we’re diving into a topic that you should know about: The Rule of 72. So, if you’ve ever wondered about how to quickly estimate when your money will double with a fixed interest rate, you will learn that here.
Formula
Now, some of you might be thinking, “What exactly is the Rule of 72?” Great question. In simple terms, the Rule of 72 is a formula used to estimate the number of years required to double your money at a fixed annual rate of return or interest.
The formula is pretty straightforward. You just divide 72 by the annual rate of return. The result will give you an approximation of how long it will take for your investment to double.
For instance, let’s say you’ve got an investment with an annual interest rate of 6%. By using the Rule of 72, we can determine that it’ll take roughly 12 years for that investment to double. That’s 72 divided by 6, which equals 12. Simple, right?
Let’s use a table to clarify:
From this table, if you have an investment earning 6% annually, you can expect it to double in about 12 years. That’s 72 divided by 6.
But here’s a little deeper dive for those curious minds out there. Why 72? Well, this number isn’t just picked out of thin air. The Rule of 72 actually comes from the world of logarithms and is a simplified version of a more complex formula. But for our purposes and quick mental calculations, 72 does the trick quite well.
Let’s see the power of compound interest over time with an initial investment of $1,000:
As you can see, the rate of return has a significant impact on your money’s growth over time. A higher rate of return can drastically increase the amount you’ll have after several years, showcasing the magic of compound interest.
It’s crucial, especially if you are young, to understand this rule because it showcases the power of compound interest. The sooner you start investing, even if it’s a small amount, the quicker your money can potentially grow. And that is how you set yourself up for a brighter financial future.
The Rule of 72 is a fantastic tool for getting a quick estimate on the power of your investments. It’s a testament to the magic of compound interest and a reminder to start investing early and consistently. Remember, the key is not just about making money, but letting your money work for you.
Lesson Resource
- The Rule of 72 | Understand and Learn How to Calculate Lesson – Teaching lesson plan for this lesson.
