Applications of Rule of 72

Learning Objectives
After completing this module, you will be able to: Define Rule of 72 Demonstrate practical uses of Rule of 72

Concept of Compounding Interest

Savings account of $1,000; Earning 10% interest (compounded annual)
Year 1: $1,100 Year 2: $1,210 Year 3: $1,331

How long will it take to DOUBLE your initial savings account amount?
(no additional contributions/deposits; constant rate of return)

Rule of 72:
How long an investment will take to double, given a fixed annual rate of compounding interest. By dividing 72 by the annual rate of return, investors can get a rough estimate of how many years it will take for the initial investment to duplicate itself.

Formula: (Simple Division)

72 / RR = approx. # of years to double investment

Source: http://www.investopedia.com/ask/answers/04/040104.asp

For example, the rule of 72 states that $1 invested at 10% would take 7.2 years ((72/10) = 7.2) to turn into $2. In reality, a 10% investment will take 7.3 years to double ((1.10^7.3 = 2).
Rate of Return 2% 3% 5% 7% 9% 12% 25% Rule of 72 36.0 24.0 14.4 10.3 8.0 6.0 2.9 Actual # of Years 35 23.45 14.21 10.24 8.04 6.12 3.11 Difference (#) of Years 1.0 0.6 0.2 0.0 0.0 0.1 0.2

50%
72% 100%

1.4
1.0 0.7

1.71
1.28 1

0.3
0.3 0.3

Source: http://www.investopedia.com/ask/answers/04/040104.asp

Future Value of Investments Retirement

Road to a Million

Year 2010 2016 2022

Age 35 41 47

Retirement Savings $250,000 $500,000 $1,000,000

Assumed estimated investment annual rate of return of 12%. Annual Compounding.

Future Value of Costs Higher Education

Projected 4-Year Tuition and Fees Today - Age 6 (2010) $121,800 $32,600 $70,000 In 12 Years - Age 18 (2022) $243,600 $65,200 $140,000

Type of Institution Private College Public/University (in-state resident) 2 Years Community College & 2 Years Private College

According to The College Board, the ten-year historical annual rate of increase is approximately 6%. (Annual compounding)
Source: http://www.savingforcollege.com/tutorial101/the_real_cost_of_higher_education.php

Information Technology Capacity Management

Server Disk Space (Storage)

Disk Space Currently Used Maximum Capacity 500G 1,000G

Year
2010

Late 2014 (~4.5yrs)

Server disk space utilization forecasted annual increase growth rate of 16%. (Annual Compounding)

Answer: 72/16=4.5 years

Quiz
Savings account of $1,000; Earning 10% interest (compounded annual)

How long will it take to DOUBLE your initial savings account amount?
(no additional contributions/deposits; constant rate of return)

Answer: 7.2 years (72/10=7.2)