**What is the Rule of 72?**

*Notes from the video ‘***Diffusion Academy| Finance |Rule of 72?**‘ :

**Diffusion Academy| Finance |Rule of 72?**‘ :

**What is Rule of 72?**

**The rule of 72 is a great mental math shortcut for estimating how long it will take compounding interest to double an investment.**

**To estimate the number of years required to double your money:**

You have to divide 72 by the compound annual interest rate.

For example, if we want to find out how long it will take for an investor who invests $100,000 at 5% annual interest rate to double his money. We can use the rule of 72.

When we substitute these values into the formula, we get an estimation of around 14.4 years.

**We can also use the rule of 72 to find out how long it will take for money to lose half its value because of inflation.**

For example, when inflation rate goes up from 2% to 3%, your money will lose half its value in 24 years instead of 36.

**The rule of 72 shows why a seemingly small difference in inflation or GDP expansion has such a huge effect in forecasting models.**

**The Rule of 72 can also be used in areas other than finance.**

An example would be to calculate how many years it will take for the population to double.

A country with population growth rate of 3% will double in population in 24 years. If the population growth rate was at 5% instead, the population will double in 14 years!

That’s 10 years difference with just 2 percentage points!

The Rule of 72 shows how a seemingly small change in the growth rate could be a huge problem for planning.

Although the rule of 72 is useful as a quick, mental calculation to estimate how long it will take for an investment to double, it is important to note that the **rule of 72 is just an approximation and not exact.**

For example, in the first example, we stated that the investor will double his money in 14.4 years at a 5% annual interest rate.

This figure is only an estimation and the actual number of years it takes for the investor to double his money at 5% annual interest rate is 14.21 years.