What are the limitations of the Rule of 72?
Disadvantages: The Rule of 72 is mostly accurate for a lower rate of returns between 6-10%. For anything higher, the estimated value can fluctuate. It is not an accurate value and can only give a rough estimation of the period for doubling the investment.
The Rule of 72 is derived from a more complex calculation and is an approximation, and therefore it isn't perfectly accurate. The most accurate results from the Rule of 72 are based at the 8 percent interest rate, and the farther from 8 percent you go in either direction, the less precise the results will be.
The Rule of 72 is a quick, useful formula that is popularly used to estimate the number of years required to double the invested money at a given annual rate of return. Alternatively, it can compute the annual rate of compounded return from an investment given how many years it will take to double the investment.
- Given a fixed annual rate of return, how long will it take for an investment to double.
- The approximate number of years it will take for an investment to double.
- That compounding can significantly impact the length of time it takes for an investment to double.
What is the rule of 72? A way to determine how long an investment will take to double, given a fixed annual rate of interest. Math example: You divide 72 by the annual rate of return.
Terms in this set (16)
Rule of 72. 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.
Variations on the rule also tend to get used because the rule of 72's accuracy is best limited to a small number of low rates of return. It's most accurate at an 8% interest rate, with 6-10% being its most accurate window.
The rule of 72 can also tell you about money decay. For instance, if inflation is 8%, then 72 divided by 8 tells you that your money will be worth about half its current value in about 9 years (72 / 8). On the other hand, if inflation decreases to 6%, your money would then lose half its value in 12 years (72 / 6).
Rule of 70 Versus Real Growth
In 1953, the growth rate was listed as 1.66%. By the rule of 70, the population would have doubled by 1995. However, changes to the growth rate lowered the average rate, making the rule of 70 calculation inaccurate.
The rule of 72 is best for annual interest rates. On the other hand, the rule of 70 is better for semi-annual compounding. For example, let's suppose you have an investment that has a 4% interest rate compounded semi-annually or twice a year. According to the rule of 72, you'll get 72 / 4 = 18 years.
What is the difference between the rule of 70 and the Rule of 72?
The Rule of 70 is calculated by dividing 70 by the compound annual growth rate (CAGR), while the Rule of 72 is calculated by dividing 72 by the CAGR. The main difference between the two rules is that the Rule of 70 is more accurate overall, but is more difficult to use from a mental math perspective.
In finance, the Rule Of 72 is probably used in preference to the Rule Of 70 as 72 has more whole number divisors (72, 36, 24, 18, 12, 9, 8 and 1) than 70 (70, 35, 14, 10, 7 and 1).
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.
As a rate of return, long-term mutual funds can offer rates between 12% and 15% per year. With these mutual funds, it may take between 5 and 6 years to double your money. Kisan Vikas Patra (KVP): It comes under the Post Office Small Saving Scheme.
The Rule fo 70 Even Applies to Negative Growth
For example, if a country's economy has a growth rate of -2% per year, after 70/2=35 years that economy will be half the size that it is now.