How is the Rule of 72 used in finance?

The Rule of 72 is a simple and useful financial formula that allows individuals to estimate the time required for an investment to double in value, based on a fixed annual rate of return. By dividing 72 by the annual interest rate (expressed as a whole number), you can quickly gauge how many years it will take for your investment to grow to twice its original amount.

For example, if an investment earns an annual return of 6%, dividing 72 by 6 gives you 12 years for that investment to double. This rule is particularly valuable for quick calculations and helps investors make informed decisions about where to allocate their money. It does not directly involve calculating tax deductions, compute compound interest in a detailed manner, or assess loan interest rates, making it specifically useful in determining the growth of investments over time.