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Want to determine how long it will take to double your investment given a fixed interest rate? The ‘Rule of 72’ gives you this answer! The ‘Rule of 72’ in this case is a simplified way to determine how long an investment will take to double, given a fixed annual interest rate. By dividing 72 by the annual rate of return (72/R), investors can get a rough estimate of how many years it will take for their initial investment to double.
Let’s say for example, you decide to invest $1000 in an index fund tracking the S&P 500 at a 10% annual return. In this case, $1000 would turn into $2000 after 7.2 years (72/10=7.2).
You can also run this rule backwards-if you want to double your money in 5 years, just divide 5 into 72 to find that it will require an interest rate of about 14.4%. Therefore Y=72/R and R is 72/Y. Simple!
To sum up, to find out how long it takes to double your initial investment, divide 72 by the interest rate, and to find out what interest rate is required to double your investment within a specific time period, you simply divide 72 by the number of years.
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Like this post? You may also like this article on the power of compound interest.
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