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Rule Of 72 For Compound Interest State

Referencing Styles : Harvard | Pages : 1

Rule 72 depicts the manner of identifying the duration of doubling the investment for a given stable yearly rate of interest. The feature of the Rule 72 helps in identifying the approximate duration that can duplicate the initially made investment. One of the instances of the Rule of 72 can be depicted as, if an amount of 1 dollar being invested with a yearly fixed rate, 10 percent, it can be estimated by the application of the Rule of 72 that it will consume around 7.2 years to double itself to 2 dollars, i.e. 72/10= 7.2. In practical life the investment of one dollar with the yearly fixed rate, 10 percent will require 7.3 years for doubling up the amount invested initially, {1.10^7.3=2}. The accuracy of the Rule of 72 is applicable majorly for the lower rates of return.

Rate of Return (%)

Rule of 72

Actual duration (years)

Differences in duration (years)

2

36.0

35

1.0

3

24.0

23.45

0.6

5

14.4

14.21

0.2

7

10.3

10.24

0

9

8.0

8.04

0

12

6.0

6.12

0.1

25

2.9

3.11

0.2

50

1.4

1.71

0.3

72

1.0

1.28

0.3

100

0.7

1

0.3

 

The above presented chart depicts the differences deduced from the actual duration of doubling the invested amount and the data extracted from the Rule of 72.

The compounding periods of an investment decision can be calculated by the application of the Rule of 72 in regards with natural logarithms. The logarithm concept depicts the differing value of specific power like the reverse of 103 can be reflected as log base of 10 of the value 1,000. The formula of the Rule of 72 can be reflected as,

Rule of 72 = ln(e) = 1, e = 2.718281828

The sum of time required for the purpose of accomplishing growth in a specific level is known as natural logarithm. The feature of natural logarithm is directed towards continuous compounding. For the purpose of increasing the level of accuracy in the Rule of 72, with the association with a close similarity with the formula of compound interest. However, the process of identifying the resemblance with the compound interest properties, the Rule of 72 can be converted to Rule of 69.3. The applicability of Rule of 69.3 is used for the purpose of incorporating accuracy in the system of return of interest.

The importance of the Rule of 72 can be depicted by its quick and easy method/formula for the purpose of estimating the duration of doubling the actual invested amount with a specific rate of interest for the motive of accomplishing a significant rate of return. The understanding regarding the ‘Rule of 72’ reflects the knowledge about the investment returns, the reason behind limited funds (for effective outcomes) and benefits regarding tax advantages. The ‘Rule of 72’ makes the process of calculation in regards with the return of investment for compound interest much simpler and constructs a base for investment decisions.

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