Q&A for How to Use the Rule of 72

A good example is if you have $100 and you've mentioned a daily interest rate. Assuming an annual interest rate of 10% on a loan of $100, it means you agree to pay back $110 at the end of the year. Now, if we're dealing with daily compounding, the daily interest would be calculated as 10% divided by 365 days in a year. This equates to approximately 0.027%, or around 2.7 cents per day. Over the course of a year, this adds up to $10 in interest. So, on a daily basis, you're looking at about 0.027% interest.

Let's delve into the compound annual growth rate (CAGR). Instead of being the borrower, envision yourself as the lender, like a bank investing $100 in someone. Anticipating a return of $110 by the year's end, on December 31, you have $110. The following day, your 10% return is not just on the original $100 but on the new total of $110. This compounding effect unfolds annually, meaning in the second year, you're not just earning 10% on the initial $100; it's 10% on the new amount, resulting in $11. This progression represents the annual growth of your money.

It's a handy shortcut when considering compounded, monetary gains or losses. For example, you might want to know how long it would take for invested money to double in value, given a specific rate of interest. See the introduction to the above article.

The formula for annual compound interest (A) is: P [1 + (r / n)]^(nt), where P=principal amount, r = the annual interest rate as a decimal, n = the number of times the interest is compounded per year, and t = the number of years of the loan or investment.

It depends on how often the interest compounds: annually, semi-annually, quarterly, monthly or daily.

Rule of 69 is also another tool used to calculate the time it takes for an investment to double up. The calculation is to divide 69 by the rate of return for an investment and then add 0.35 to the result. Doing so yields an approximately correct estimate of the time period required.