What is the rule of 72?

The rule of 72 is a commonly used formula that simplifies the process of estimating how long it will take for an investment to double in value based on a fixed annual rate of return. By dividing 72 by the annual interest rate (expressed as a whole number, not a decimal), an individual can quickly gauge the approximate number of years required for the initial investment to grow into double its amount.

For example, if an investment earns a return of 6% per year, dividing 72 by 6 gives you approximately 12 years to double your investment. This quick mental math makes it a convenient tool for investors to assess potential growth in their portfolios without needing extensive calculations or financial software.

Other options present valuable concepts, but they do not directly pertain to the essence of the rule of 72. While determining the life of an investment, calculating compound interest, or setting investment goals are important financial considerations, they do not encapsulate the specific purpose of the rule of 72, which is to provide a straightforward estimation of the time needed to double an investment’s value.