What is Rule of 72

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Rule of 72 = (72 ÷ r)

r = rate (in whole numbers)

The rule of 72 formulas is used to figure out the length of time required to double the investment with simple calculating technique. Moreover, as we said before rule of 72 is applied in a situation where a person requires quick calculations instead of a detailed working with exact time to double an investment. The exact formula requires logarithms and often people don’t have access to calculators for that purpose. That’s why rule of 72 is useful in such case while it is easy to remember to calculate the time for doubling investment.

Rule of 72 illustration

Let’s suppose that Belker & Sons Company is getting 8% return on a money market account and they would like to calculate the time to double the investment. While calculations we suppose that there will be no withdrawals or deposits in that account. After putting values in the equation, we get the answer that it will take 9 years to double the investment.

How rule of 72 formula can help investors?

Rule of 72 formula can be useful in multiple ways. Typically financial analysts use this formula to get time period estimates in situations where the available rate is in percent form. But there is a limitation with this rule which breaks out when the rate become too high or too low the estimates become less accurate.

While on the other side another drawback arise with large amounts of money. The formula do not consider the amount of money invested, if a company is investing big money the outcome will remain same. Instead in such a situation company must use the actual doubling time formula to get a precise result.

Is there any alternative to Rule of 72

There is an alternative to rule of 72 but it needs some extra efforts and time also it is called Doubling time formula. However, for quick calculations we can also reverse the values available in Rule of 72 formula with that we can simply get a rate to double the investment in specific time.

Rate required to double = 72 ÷ t

t = length of time

Here with the above formula we can quickly get an estimate about the rate required to double the investment in a given time.

 

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