In finance, these rules are methods to estimate the time of an investment’s doubling (exponential growth) or halving (decay).
Let’s try, you use initial capital with $1,000 and increase the value by 20% annually see how many year it takes to double the initial value.
Year 1: $1,000 × 20% = $200
Year 2: ($1,000 + $200) × 20% = $240
Year 3: ($1,200 + $240) × 20% = $288
Year 4: ($1,440 + $288) × 20% = $345.60
End of year 4, the value has double from $1,000 to $2073.60. This means it takes between 3 to 4 years to double the value by 20% increment.
Rule of 72:
This is to estimate the number of periods required to double an original investment, divide the most convenient "rule-quantity" by the expected growth rate, expressed as a percentage.
72 ÷ (Annual Percentage return) = number of years your investment would double
For instance, if you were to invest $1,000 with compounding interest at a rate of 20% per annum, the rule of 72 gives 72 ÷ 20 = 3.6 years required for the investment to be worth $2,000.
Rule of 70:
Similarly, to determine the time it takes for the value of money to half at a given rate, divide the rule quantity by that rate.
70 ÷ (Rate) = Time period of the value become half
Example, if the inflation rate is 3.5%, the value of the money we have will be half in 20 years. Use the rule of 70, 70 ÷ 3.5 = 20. It can be use to estimate the impact of the additional fees on financial policies such as unit trust, mutual fund, load, insurance, expenses etc.
Let’s try, you use initial capital with $1,000 and increase the value by 20% annually see how many year it takes to double the initial value.
Year 1: $1,000 × 20% = $200
Year 2: ($1,000 + $200) × 20% = $240
Year 3: ($1,200 + $240) × 20% = $288
Year 4: ($1,440 + $288) × 20% = $345.60
End of year 4, the value has double from $1,000 to $2073.60. This means it takes between 3 to 4 years to double the value by 20% increment.
Rule of 72:
This is to estimate the number of periods required to double an original investment, divide the most convenient "rule-quantity" by the expected growth rate, expressed as a percentage.
72 ÷ (Annual Percentage return) = number of years your investment would double
For instance, if you were to invest $1,000 with compounding interest at a rate of 20% per annum, the rule of 72 gives 72 ÷ 20 = 3.6 years required for the investment to be worth $2,000.
Rule of 70:
Similarly, to determine the time it takes for the value of money to half at a given rate, divide the rule quantity by that rate.
70 ÷ (Rate) = Time period of the value become half
Example, if the inflation rate is 3.5%, the value of the money we have will be half in 20 years. Use the rule of 70, 70 ÷ 3.5 = 20. It can be use to estimate the impact of the additional fees on financial policies such as unit trust, mutual fund, load, insurance, expenses etc.
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