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The Rule of 72 of Albert Einstein is a mathematical formula used to estimate the time it takes for an investment to double in value at a fixed annual interest rate. How does the Rule of 72 work? The Rule of 72 states that you can approximate the number of years it takes for an investment to double by dividing 72 by the annual interest rate (as a percentage).
Formula: Years to double = 72/ Interest Rate (%)
Example:
Let us say you have an investment with a 6 % annual interest rate. Using the Rule of 72: Years to double = 72/ 6 = 12 years.
This means it will take approximately 12 years for your investment to double in value at a 6% annual interest rate.
Important considerations: The Rule of 72 is an estimation. It is not effectively accurate, especially at higher interest rates, the less accurate the approximation becomes. More precise calculations can be done with logarithms, but the Rule of 72 offers a quick, handy estimate. The Rule of 72 works because it is based on the concept of compound interest, where the interest earned on your investment also earns interest over time. The rule assumes a fixed annual interest rate. Fluctuations in interest rates will affect the actual time it takes for your investment to double.
Formula: Years to double = 72/ Interest Rate (%)
Example:
Let us say you have an investment with a 6 % annual interest rate. Using the Rule of 72: Years to double = 72/ 6 = 12 years.
This means it will take approximately 12 years for your investment to double in value at a 6% annual interest rate.
Important considerations: The Rule of 72 is an estimation. It is not effectively accurate, especially at higher interest rates, the less accurate the approximation becomes. More precise calculations can be done with logarithms, but the Rule of 72 offers a quick, handy estimate. The Rule of 72 works because it is based on the concept of compound interest, where the interest earned on your investment also earns interest over time. The rule assumes a fixed annual interest rate. Fluctuations in interest rates will affect the actual time it takes for your investment to double.