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Rule of 72

The rule of 72 is a convenient way for finance experts to figure out how long it will take an investment to double based on a compound interest rate.

A simple rule of thumb is to divide the amount of interest into 72, the result will be the number of years it takes for an investment to double. For example an investment that increases at a compound rate of 9 percent per year will double in about 8 years.

The rule, when made into a formula, looks something like this:

72 / interest rate = approximate years to double

You can also work this formula backwards to find out how well you did on an investment. If, for example, you sell your home for double the price you bought it for five years later you could divide the length of time you held the home by 72. If you held the house for five years, you did pretty well, because the effective interest rate would have been 14.2%. Using the same process, you can figure out how much interest you would have to earn to double your money within a certain time-frame.

The rule of 72 is actually a simplification and is by no means exact. There is a more complicated formula for finding the actual figures:

Interest formula is equal to P times the quantity of 1 plus r over 100 quantity raised to the power of n equals P times two.

In this formula "P" is the principal, "r" is the rate, "n" is the time period. Only this formula proves a bit more cumbersome as it travels into the realm of exponential notation and even messing about with logarithms. -----

There is an excellent illustration of how this works in Douglas R. Andrew's book The Last Chance Millionaire: It's Not Too Late to Become Wealthy.

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