The rule of 72 in economic terms can give a reasonable estimate of how long it will take for an investment to double in value. But, remember, it is only an estimate. It can be used as a guide to determine whether an investment ‘fits’ with your retirement goals.
Take an example: you invest $2,000 at an annual (and steady) rate of return of 3%.
Take 72 and divide it by 3, which gives you 24 years.
In 24 years your $2,000 will have become $4,000. Or…
Putting it another way, you have to wait 24 years for your $2,000 to double to $4,000.
And the Rule of 72 is useful to determine how inflation can ‘erode’ your money. If the inflation rate is 2%, 72 divided by 2 equals 36. Take 36 and halve it, and It would take approximately 18 years for your investment to lose half of its purchasing value due to inflation.
Although not precise, the Rule of 72 is a simple way to evaluate investments.
If you desire a more technical explanation of the Rule of 72, you can go to the Investopedia.com/investing/investingstrategy site for in-depth information on compounding periods; logarithms and time value of money (TVM) formulae.
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