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# Rule of 72 - by Ron Owens

Recently, a friend and I were discussing interest rates and how long it would take to double your money. During our discussion he introduced me to the Rule of 72.�� It is a simple and fairly accurate formula to determine the number of years it takes to double your money at different interest rates.� You simply divide 72 by the average annual return percentage on your savings or investments to get the approximate number of years it takes to double your money.

Examples

An 8% return doubles your money in nine (9) years:

72�divided by��8 �= �9

or

A 10% return doubles your money in 7.2 years:

72 divided by 10 = 7.2

It should be noted that the Rule of 72 applies to exponential growth and is therefore usedfor 'compound interest' as opposed to simple interest calculations.� Compound interest is defined as the interest that accrues on the initial principal and the accumulated interest of a deposit, loan or debt.� Compounding of interest allows the principal amount to grow at a faster rate than simple interest; which is calculated as a percentage of the principal amount only.�� (Investopedia.com)�In short compound interest happens when interest is added to the principal amount, so that from that moment on, the interest�that has been addes also earns interest.��For example, a \$1,000.00 deposit that has grown to \$1,150.00, via compound interest, would have interest figured on the \$1,150.00 amount and not the original deposit amount of \$1,000.00. Next time you find yourself needing to do a quick calculation of how an investment might work out for you remember the Rule of 72.