The Relationship between Rule of 72 the Time Value of Money (TVM)

The Relationship between Rule of 72 the Time Value of Money (TVM)

The “Rule of 72” is a simple way of issuing an estimate regarding the amount of time it may take to compound interest leading to doubling an investment. To obtain a rough estimate of the length of time that may be required for an initial investment to double itself, an investor divides 72 by annual return rate. On the other hand, “Time Value for Money” is an old investment concept that is taken to mean the money at hand is worth more than such an amount in the future as a result of its potential earning capacity (Investopedia, 2020). Universal finance principle is premised on the idea that as long as money can earn interest, it becomes worth more the sooner it can be obtained.

Relationship between Time Value of Money and Rule

Both the Time Value of Money and Rule of 72 are complimentary of each other in the sense that the former advances the idea that individuals would rather have money with them today and not in future given there is a possibility of earning compound interest hence adding more value in what is presently held rather than what is to be held later (Irena & Mariana, 2017). Every investor would reason and act exactly in line with the dictates of the time value of money. By agreeing with the precepts putting together the principle of the time value of money, an investor will need some additional knowledge as far as investing is concerned. Rule of 72 is one of those basic ideas that investors will need to equip themselves with. Before taking part in any investment plan or idea, companies and investors take a deep dive into such plans just to ensure everything is clear.  Rule 72 is one of those concepts that provide quick and simple means of understanding an investment plan by issuing an estimate regarding the amount of time it may take to compound interest leading to doubling an investment.

References

Investopedia (2020); Making Sense of the Rule of 72        Retrieved from https://www.investopedia.com/ask/answers/what-is-the-rule-72/

Irena, M., & Mariana, B. (2017). The Time Value of Money in Financial Management. Ovidius University Annals, Economic Sciences Series, 17(2), 593-597.

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