Rule of 72 Explained - This Formula Will Change Your Life

The Rule of 72 in finance refers to a mathematical formula to illustrate compounding. Here we'll explore what it is, how it works, how to use it, and examples.

// TIMESTAMPS:

00:00 - Intro - What Is the Rule of 72?
00:43 - How the Rule of 72 Works
01:13 - Rule of 72 Formula for Calculation
01:40 - Rule of 72 Examples
02:21 - Rule of 72 Flaws
03:37 - How To Use the Rule of 72
04:38 - Conclusion

// SUMMARY:

The Rule of 72 is simply a mathematical formula to estimate the number of years for an investment to double based on its rate of return.

The formula for the Rule of 72 to calculate the number of years for an investment to double is as follows:

y = 72 / r

where y is the years to double and r is the expected rate of return or interest rate of the investment.

We can also use the Rule of 72 in reverse to see the interest rate required for an investment to double in a given number of years, such as:

r = 72 / y

where r is the rate of return and y is number of years.

The Rule of 72 is a very rough approximation and is thus more of an illustration or a learning tool that realistically is of little practical use in the context of stock market investing other than showing how compound interest works.

However, the Rule of 72 is much more useful in the real world for rates with much less variability, such as fees, interest rates for credit cards or loans, and inflation.

#compounding #ruleof72 #compoundinterest

// INVEST

// SOCIAL

I appreciate all the support!

Disclosure: Some of the links above are referral links. At no additional cost to you, if you choose to make a purchase or sign up for a service after clicking through those links, I may receive a small commission. This allows me to continue producing high-quality content on this channel and pays for the occasional cup of coffee. I have first-hand experience with every product or service I recommend, and I recommend them because I genuinely believe they are useful.