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Concept
Rule of 72
Summary
In finance, the rule of 72, the rule of 70 and the rule of 69.3 are methods for estimating an investment's doubling time. The rule number (e.g., 72) is divided by the interest percentage per period (usually years) to obtain the approximate number of periods required for doubling. Although scientific calculators and spreadsheet programs have functions to find the accurate doubling time, the rules are useful for mental calculations and when only a basic calculator is available.
These rules apply to exponential growth and are therefore used for compound interest as opposed to simple interest calculations. They can also be used for decay to obtain a halving time. The choice of number is mostly a matter of preference: 69 is more accurate for continuous compounding, while 72 works well in common interest situations and is more easily divisible.
There are a number of variations to the rules that improve accuracy. For periodic compounding, the exact doubling time for an interest rate of r percent per period is
where t is the number of periods required. The formula above can be used for more than calculating the doubling time. If one wants to know the tripling time, for example, replace the constant 2 in the numerator with 3. As another example, if one wants to know the number of periods it takes for the initial value to rise by 50%, replace the constant 2 with 1.5.
To estimate the number of periods required to double an original investment, divide the most convenient "rule-quantity" by the expected growth rate, expressed as a percentage.
For instance, if you were to invest 200; an exact calculation gives ln(2)/ln(1+0.09) = 8.0432 years.
Similarly, to determine the time it takes for the value of money to halve at a given rate, divide the rule quantity by that rate.
To determine the time for money's buying power to halve, financiers divide the rule-quantity by the inflation rate. Thus at 3.
Official source
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