The Rule of 72 helps investors understand how long it will take for their initial investment to double.
Understanding at an early age how money grows is important. Time is a key component to building a respectable savings for later in life. Helping youth understand the power of compound interest and the Rule of 72 is a simple way to prepare youth to utilize their investing advantage of time.
The Rule of 72 provides an estimate on the number of years it will take money to double in respect to the interest rate. To use, divide 72 by the expected annual rate of return to get the number of years it will take your money to double in value. For example, if a person invests $2,000 at an interest rate of 8%, it will take approximately nine years for their money to equal $4,000 (72 ÷ 8 = 9).
Even better is that this will continue to happen at least every nine years, provided the interest rate stays at 8%, even if the investor never contributes another dollar. This phenomenon is called thetime value of money. With this in mind, it isn’t hard to realize that the sooner you begin investing your money, the more time it has to grow new money.
The salient point here is that the amount available to you at retirement will be greater if you start sooner versus later. If you start the same savings account in your 30s, you can contribute 3.5 times as much money to your fund and it still won’t grow into the same size nest egg as the person who started saving in their late teens. In thisYouTube video, financial guru Dave Ramseyuses the same Time Value of Money Calculator charts as theNational Education for Financial Educationto illustrate how compound interest works.
Helping youth understand the Rule of 72 earlier in life can help them focus on the importance of building a savings or investment account. Invest now and watch the money grow.
Michigan State University Extension and Michigan 4-H Youth Development help to prepare young people for successful futures. As a result of career exploration and workforce preparation activities, thousands of Michigan youth are better equipped to make important decisions about their professional future, ready to contribute to the workforce and able to take fiscal responsibility in their personal lives. For more information or resources on career exploration, workforce preparation, financial education or entrepreneurship, contact [email protected].
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An early understanding of the Rule of 72 is critical to youth financial literacy. Updated from an original article written by Sienna Suszek. The Rule of 72 helps investors understand how long it will take for their initial investment to double. Understanding at an early age how money grows is important.
What is the rule of 72 in financial literacy? ›
Do you know the Rule of 72? It's an easy way to calculate just how long it's going to take for your money to double. Just take the number 72 and divide it by the interest rate you hope to earn. That number gives you the approximate number of years it will take for your investment to double.
Why is the rule of 72 important when making investment decisions? ›
The Rule of 72 is not precise, but is a quick way to get a useful ballpark figure. For investments without a fixed rate of return, you can instead divide 72 by the number of years you hope it will take to double your money. This will give you an estimate of the annual rate of return you'll need to achieve that goal.
How can you use the rule of 72 to make financial planning decisions? ›
By dividing 72 by the annual interest rate, one can quickly determine the approximate number of years required for the investment to grow twofold. This rule is particularly useful for interest rates between 6% and 10%, offering a quick mental calculation for investors and financial planners alike.
What is the key to making sure the rule of 72 works for you? ›
The Rule of 72 works best in the range of 5 to 10 percent, but it's still an approximation. To calculate based on a lower interest rate, like 2 percent, drop the 72 to 71. To calculate based on a higher interest rate, add one to 72 for every 3 percentage point increase.
What does the Rule of 72 implies? ›
Here's how the Rule of 72 works. You take the number 72 and divide it by the investment's projected annual return. The result is the number of years, approximately, it'll take for your money to double.
What is the financial literacy Rule of 72 just for fun answers? ›
The “Rule of 72” is magical, considered the most important and simple rule to financial success. Why, you ask? When the number 72 is divided by the interest rate (percentage rate paid on money saved, invested or owed), the answer is the number of years it will take that money to double.
What is the rule of 72 in finance quizlet? ›
The number of years it takes for a certain amount to double in value is equal to 72 divided by its annual rate of interest.
Is the rule of 72 Risky? ›
Even though the rule of 72 isn't a perfect formula for calculating your investment performance, it can help you with investment planning. That's because you can use the rule as a guide when defining realistic financial goals and choosing investments that match your risk tolerance.
What are the flaws of rule of 72? ›
Errors and Adjustments
The rule of 72 is only an approximation that is accurate for a range of interest rate (from 6% to 10%). Outside that range the error will vary from 2.4% to 14.0%. It turns out that for every three percentage points away from 8% the value 72 could be adjusted by 1.
You divide 72 by your expected annual rate of return. This calculation will help you arrive at the approximate number of years it'll take for your investment to double. Consider this example: 5% Rate of Return: If you're anticipating an average return of 5% on an investment, you'd divide this return into 72.
What are the golden rules of financial planning? ›
As soon as you get your salary, start putting it under various heads. These heads can be expenses, EMIs, investments, and savings. Ensure that you save a minimum of 10% of your income every month. It can be that simple!
What does the Rule of 72 enables you to estimate? ›
The Rule of 72 is a convenient method to estimate the approximate time for invested capital to double in value. By merely taking the number 72 and dividing it by the rate of return (or interest rate) expected to be earned, the output is the approximate number of years for an investment to double.
How to double $2000 dollars in 24 hours? ›
The Best Ways To Double Money In 24 Hours
- Flip Stuff For Profit. ...
- Start A Retail Arbitrage Business. ...
- Invest In Real Estate. ...
- Play Games For Money. ...
- Invest In Dividend Stocks & ETFs. ...
- Use Crypto Interest Accounts. ...
- Start A Side Hustle. ...
- Invest In Your 401(k)
The Rule of 70, while generally more accurate, is less convenient for mental calculations due to the indivisibility of 70 by common numbers such as 3, 4, 6, 8, 9, or 12. Conversely, the Rule of 72, being divisible by those numbers, is often preferred for its ease of use despite being slightly less accurate.
What is rule 69 and 72 in financial management? ›
Rules of 72, 69.3, and 69
Rules of 69.3 and of 69 are also methods of estimating an investment's doubling time. The rule of 69.3 is considered more accurate than the Rule of 72, but can be much more troublesome to calculate. Therefore, investors typically prefer to use a rule of 69 or 72 rather than the rule of 69.3.
What is the 50 30 20 rule for financial literacy? ›
The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals. Let's take a closer look at each category.
Is the Rule of 72 Risky? ›
Even though the rule of 72 isn't a perfect formula for calculating your investment performance, it can help you with investment planning. That's because you can use the rule as a guide when defining realistic financial goals and choosing investments that match your risk tolerance.
