![]() ![]() Rule of 72 compound interest considerations There are certain things to consider when using the rule. In this section, you will learn what works as per the rule of 72 definition. Here is the calculation on how I arrived at the 14.4 years’ estimate.ħ2/5 = 14.4 years for your purchasing power to lose half its value How does the Rule of 72 work For example, your purchasing power will lose half its value every 14.4 years at an average inflation rate of 5%! The rule of 72 is an easy way to assess the impact of inflation on your purchasing power. You can use the rule of 72 to assess the cost of not paying off your debt within the specified time periods.ħ2/10 = 7.2 years to double your current balance owedįor example, if the loan rate is 10%, then not paying the debt would result in the amount owed doubling every 7.2 years! Rule of 72 Inflation – purchasing power losing half its value This is due to the compounding interest charged by the loan issuer. The future value of most financial products such as loans can balloon if one doesn’t pay the principal in time. Materials: Formula for rule of 72 Rule of 72 Finance Investors can also use the rule as a quick estimation tool to calculate the average rate needed to double their investments if they already know the years required. In personal finance, the rule of 72 is a great tool for investors to quickly estimate the approximate number of years to double their principal.
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