Financial Counseling Certification Program (FiCEP) Practice Exam

What does the Rule of 72 help to determine?

1. The interest rate for savings accounts

2. The years needed to double an investment

3. The amount of investment needed to retire

4. The effective tax rate on investments

The correct answer is: The years needed to double an investment

The Rule of 72 is a straightforward formula used to estimate the number of years required to double an investment based on a fixed annual rate of return. By dividing 72 by the expected annual rate of return (expressed as a percentage), you can quickly assess how long it will take for your investment to grow to twice its initial value. For example, if you anticipate an 8% annual return, you would calculate 72 divided by 8, which gives you 9 years. This makes the Rule of 72 a valuable tool for investors as it provides a quick mental calculation for evaluating potential investment growth over time. Other options presented focus on different financial aspects: the interest rate for savings accounts, the required amount for retirement, and effective tax rates, none of which directly relate to the doubling of an investment in the context provided by the Rule of 72.