The rule of 72 is a simple way to figure out how long it will take an amount of money to double. All you need to do is divide 72 by the annual interest rate. This will give you a relatively close estimate to the number of years before your money is doubled.
[72 ÷ 8% = 9 Years]
The higher the interest rate, the less time it will take to double your money. But this goes both ways. If you have a 10-year car loan at 8% interest, the lender will take double what the original loan was worth.
- An investment at 1% interest will take 72 years to double your money.
- An investment at 4% interest will take 18 years to double your money.
- A loan at 6% interest will take 12 years to lose twice what you originally owed.
- A loan at 10% will only take 7.2 years to lose twice what you originally owed.
That is why the rule of 72 is a simple way to evaluate a loan before you jump in. If are good with numbers, you can do it in your head. If you are like me, then just punching in the number in a calculator is a quick step.
Just keep in mind that the rule of 72 isn’t completely accurate. Using 69 or 69.3 will lead to a more accurate calculation. However, dividing 69.3 by varying interest rates can be a little more cumbersome which is why 72 is a simple tool to use.
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