Investment terms - Rule of 72

What can be determined with the Rule of 72

How many years it will take an investment to double. How long it will take debt to double. Interest rate that an investment will need to double in a specific time period. How many times money or debt will double in a specific time period.

Simple Interest

Interest earned on the principle amount

Things to know about the Rule of 72

It is only an approximation. Interest rate must remain constant. Does not account for additional payments. Interest earned is reinvested. Tax deductions are not taken into account.

Risk

The chance that an investment's actual return will be different than expected.

Rate of return

The degree to which an asset gains (or loses) value over a given period of time.

Rule of 72

The number of years it takes for a certain amount to double in value is equal to 72 divided by its annual rate of interest.

Fixed Interest Rate

The rate will not change over the lifetime of the investment

Inflation

The steady rise in the general level of prices of a market basket of goods

Interest Rate

the percentage of a sum of money charged for its use

If you are planning for your investment to double in 6 years, what interest rate should you look for?

12%

An interest rate of 18% will take ___ years to double

4

Asset

An item of value that can be converted into cash.

Compounding Interest

Earning interest on interest

The TIme Value of Money

Money paid out or recieved in the future is not equivalent to money paid out or recieved today

Liability

Something owed to another person. Each payment takes money out of your pocket.

Wealth

The accumulation of money and assets.