What is the Rule of 72 used for?

The Rule of 72 is a simple mathematical formula commonly used in finance to estimate the number of years it will take for an investment to double in value, given a fixed annual rate of return. By dividing 72 by the annual rate of return (expressed as a percentage), investors can quickly ascertain how many years it will take for their investment to grow to twice its original amount.

For example, if an investment has an annual return of 6%, the calculation would be 72 divided by 6, which gives approximately 12 years for the investment to double. This rule is particularly useful because it provides a quick, straightforward way to gauge the effects of compound interest without the need for complicated calculations or financial tools. It emphasizes the power of compounding over time, which is a core principle in investment strategies.

While other options may relate to financial concepts, they do not involve the specific purpose of the Rule of 72, which is strictly associated with calculating the time needed for investments to double based on their rate of return.