Rule of 72 – Compute Investment Doubling Time – Finance Chapter Section 2 Saving


Finance chapters section 2, rule of 72.
When the question arises how long will it take my money to double we’re going
to use something known as the rule of 72. Here we have an example where they’re
starting with a $500 deposit in an account, that’s paying 3% interest. The question is how long will it take
for that money in the account to double. In other words reaching a $1000, with this interest rate of 3% as the growth factor. Well the rule of 72, is
used to calculate doubling time and the formula is as follows. 72 divided by the interest rate. In this
example the problems states that the interest rate is 3%. We don’t do anything
as far as converting this percentage into an equivalent decimal, we just take
the number portion of the percent and divide 72 by that value. This results
for this particular example in 24 years. $500 will grow through interest growth
to $1,000 double in 24 years. Here’s another example of how long will it take
for $100 investment to double in size if the interest earned is 5%. If you look at
that doubling time formula, it has no factor for the initial amount. What is
invested has no bearing on this formula. this could be a $1000, or $1,000,000. We’re just calculating the time for that amount, whatever it happens
to be, to double and to do that we take 72 divided by the interest rate. That’s
the factor that calculates the amount of time for doubling. So in the formula we’ll
put a 5 in place of interest rate take 72 divided by 5 and in this case we could expect the initial deposit to double in value in 14.4 years. Your now ready to do some practice on
your own beginning on page 27 in the textbook.

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