What is the Rule of 72, and why does it matter?

Understanding how your money grows over time is crucial to investing and personal finance. The Rule of 72 is one of the most straightforward and useful tools for gauging the power of . This simple formula can help you estimate how long it will take for an investment to double in value, providing a quick snapshot of the potential impact of your financial decisions.

But what exactly is the Rule of 72, and why does it matter? Let's dive in. What is the Rule of 72? The Rule of 72 is a quick, mental math formula that estimates the number of years required to double an investment at a fixed annual rate of return. The formula is: For example, if you have an investment expected to grow at an annual rate of 6%, the Rule of 72 tells you that your money will take approximately 12 years (72 ÷ 6 = 12) to double.

The beauty of the Rule of 72 lies in its simplicity. Without needing a calculator, you can quickly assess the impact of different rates of return on your investments. Let's take an example.

Core Logic revealed Sydney house prices doubled in the past ten years, cited by the in January 2024. Using the Rule of 72, we can determine a of approximately 7%. How can we apply this to investment decisions? This is useful when comparing different investment opportunities.

Now, let's deepen our analysis by considering another key principle: over the long term, share prices tend to align with the companies' earnings growth rates. By combining these two 'rules,' we can roughly estimate the gro.