What Is The Rule Of 72 In Finance?

The rule of 72 is a formula for calculating how long it will take an investment to double in value.

It was created by Benjamin Graham, a professor of economics at Columbia University and author of “Security Analysis.”

The rule of 72 tells us that if you invest $100 today it will be worth $72 after twelve months, or $36 after 24 months, and so on.

So, if you invest $100 in an investment that doubles every year, after 12 years the investment would have grown to more than $1 million.

What exactly is the rule of 72?

The rule of 72 is a formula for calculating how long it will take an investment to double in value.

It was created by Benjamin Graham, a professor of economics at Columbia University and author of “Security Analysis.”

Basically, if you invest $100 today, it will be worth $72 after twelve months ($36 after 24 months), and so on.

So, if you invest $100 in an investment that doubles every year, after 12 years the investment would have grown to more than $1 million.

History of the rule of 72

Benjamin Graham created the rule of 72 in 1934 when he was looking for a way to buy stocks for his personal portfolio.

He wanted to know how long it would take for an investment to double without the risk that stocks typically have.

Graham calculated that if an investment doubles every year, it would take exactly fifteen years to double and become worth $1 million.

That calculation became known as the rule of 72.

The rule of 72 has been used by investors and financial professionals since then, though different formulas have been proposed over time.

For example, some people use the rule of 55 which takes into account more than one doubling cycle and is based on dividends as well as earnings changes.

But regardless of what formula you use, the rule simply tells us that you need 15 years to double your money at a rate of 10 percent.

When you invest today your money will be worth $72 at the end of 24 months and then this amount will continue to increase by around 7% per year or 36% per decade.

How to calculate the rule of 72 in finance

To calculate the rule of 72 in finance, divide 72 by the return percentage.

So if you want to see how long it will take an investment to double, divide 72 by your expected return percentage.

If you’re investing in a stock that’s expected to return 15% per year and you want your investment to double after eight years, then divide 72 by 0.15 = 6.3.

That means it will take six and a half years for your investment to double in value.

Example of calculating the rule of 72

Let’s say you wanted to calculate the rule of 72 for a savings account.

If your bank pays a 4% annual interest rate, you would have to invest $1,000 to earn a $100 return after one year.

The rule of 72 tells us that it would take 12 months for your investment to double in value and then, after 24 months, the investment would be worth $72 and then $36.

After 36 months, the investment would be worth about $24 and so on until 365 days later when your investment would be worth about just $2.

Conclusion

The rule of 72 is an approximation that is used as a tool in finance. It approximates how long it takes for an investment to double given a certain interest rate.

It states that it takes 72 divided by the interest rate to estimate how long it takes to double your investment. This can be used in investments, loans, and other financial matters.

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