Olivia has $5,000 to invest. She invests in a fund at 4% interest. How long will it take for her money to double?
Explanation
Answer: D - To calculate this answer mentally, use the Rule of 72. To determine how long it takes for something that grows to double (in this case, an investment; other examples - GDP, population), divide 72 by the rate of growth. In this example, Olivia’s money would double in 18 years (72/4).
Key Takeaway: The rule of 72 is a quick mental calculation tool that provides an estimate of how long it would take an investment to grow. To determine how long it would take for an investment to triple in value, divide 114 by the interest rate (or expected rate of return).
To determine how long it would take for an investment to quadruple in value, divide 144 by the interest rate. Remember, these are not absolute, they are estimates. However, they provide a general guideline for planning purposes.
