What is the Rule of 72 used for?

The Rule of 72 is a simple formula used to estimate the number of years it will take for an investment to double in value, given a fixed annual rate of return. By dividing the number 72 by the annual interest rate (expressed as a percentage), one can quickly estimate the time required for the investment to grow to twice its original amount.

For instance, if an investment has an annual return of 6%, using the Rule of 72, you would calculate 72 / 6 = 12 years for the investment to double. This rule is particularly useful for investors because it provides a quick and easy way to assess the potential growth of their investments without complex calculations.

Understanding this rule allows investors to strategically plan their investments and set realistic financial goals based on the expected growth. The other options do not accurately describe the primary purpose of the Rule of 72, which focuses specifically on estimating the time to double an investment rather than on calculating interest rates, determining cash-out timing, or evaluating risks.