Real Estate Concepts: Rule of 72

The Rule of 72 is one of the techniques in approximating the doubling or halving time of an investment used in the financing industry. Other rules such as the Rule of 69.3, Rule of 70, and Rule of 71 are all applied when the transaction involves exponential growth and decay.

People in the investing and financing arena best know what Rule of 72 is all about. If you meet one who does not have any idea of it, then it is safe to assume he is on the wrong side of the world. Rule of 72 is a simple formula for computing the estimated number of years for your investment to double given a fixed annual rate of return. For example, in 2008 an amount of $10,000 is invested by Gary at 10%. It will be doubled using the principle below:

Number of years to double = 72

--------------------

Interest Rate

= 72

--------------------

10

= 7.2

Dividing 72 by the annual interest rate will give you the approximate number of years for your investment to double. This means that Gary can expect his investment to reach $20,000 after 7.2 years or by the year 2015. Sounds very simple you may think but that is not the whole picture. The following observations are worth knowing to fully understand the Rule of 72:

The computed number is just estimation. If you use a manual calculation or some programs it would give the figure 7.2725 years which more accurate.

It is safe to use the Rule of 72 for interest rates falling between 3% and 12%. The estimation is less precise at higher interest rates. For instance, if the return is 100%, dividing 72 by 100 will give us .72 years where in fact it will double in just one year.

Changes on income taxes, commission, inflation, etc. are not addressed in this rule. If for some reasons the government raised income taxes then your rate of return will also be affected. When this happens, it will be longer for you to achieve the two-fold of your investment.

The interest is understood to compound annually. For return that compounds frequently, then expect to double your property value faster than the computed years when Rule of 72 was used.

In 1494, Fra Luca Pacioli, made a similar theory in one of his published works on Mathematics – Summa de Arithmetica. Apparently, no explanation or derivation was given about the observation.

Knowledge is power. What you do with what you know makes all the difference. The world of investing and personal finance is very exciting and risky at the same time. No matter how accurate the information you got, how much risk you took, there will be times that all you can do is hope for the best and expect for the worse. The Rule of 72 is one tool available to give you an idea, a practical estimation, on what to expect in terms of your investment.