QUESTION:
I’m a new investor and recently heard the term “Rule of 72”. What is it?
ANSWER:
The rule of 72 is a simple method to estimate how long it would take for an investment to double, given a fixed rate of compound interest.
To use the rule of 72, divide 72 by the annual rate of return. For example, an investor invests $20,000 at a 5% fixed annual interest rate. According to the rule of 72, it could take approximately 14.4 (72÷5) years to double.
Of course, investments such as stocks and mutual funds, have fluctuating returns, but this rule of 72 is one way to think about how fixed compound interest affects your investment.