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Understanding the Rule of 72: Planning for Your Family's Future

finances Sep 25, 2023
Rule of 72

As you plan your financial future and the best ways to secure it, I'd like to introduce you to a handy tool called the Rule of 72. It's a simple yet effective way to understand how your investments can grow over time.

What is the Rule of 72?

The Rule of 72 helps you estimate how many years it will take for your investment to double, based on a fixed annual rate of return. Simply divide 72 by the expected annual rate of return, and the result will give you an approximate number of years.

For instance: If you're considering an investment that offers a 10% annual return, it would take about 7.2 years for your money to double (72 ÷ 10 = 7.2).

Accuracy of the Rule of 72:

To give you a clearer picture, here's a chart that compares the estimates from the Rule of 72 to the actual number of years it takes for an investment to double:

As you can observe, the Rule of 72 is quite accurate, especially for returns between 5% and 12%. However, as the rate deviates from this range, the accuracy can vary slightly.

Why Use the Number 72?

The number 72 is a convenient choice for these calculations, but for those who seek a bit more precision, there's an alternative called the Rule of 69.3. It's a tad more accurate but slightly less intuitive for quick mental calculations.

How Does This Apply to Your Family's Investments?

As you plan for your child's education, your family's future expenses, or even early retirement, understanding how your investments will grow is crucial. The Rule of 72 provides a quick way to visualize this growth, helping you make informed decisions.


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