IF YOU don’t already know what the Rule of 72 is, here is an easy introduction to it and how it can help you make quicker decisions about which Fixed Deposit (FD) scheme to invest your money in and how long it will take for you to double your money in a particular scheme.
Life has certainly become easier since the advent of smartphones; you have a calculator in your pocket or bag at all times. But do you remember the complex formulas used to calculate interest rates, time periods and maturity amounts or principal deposits?
What is the Rule of 72?
The Rule of 72 is a simplified formula that calculates how long it will take for an investment to double in value, based on its rate of return. Remember that it only applies to interest that is compounded, not simple, and is reasonably accurate for interest rates that fall in the range of 6-10 per cent.
Sometimes, it is better to use the Rule of 69, Rule of 70, or Rule of 73, but all those rules are for different situations.
Formula
Expected Rate of Return
Say, you want to find out the minimum interest rate at which your principal investment will double all you have to do is apply the formula given below:
72 ÷ n
Where ‘n’ is the number of years you will have to remain invested.
Now, if you wanted to double your money in 10 years, you’ll have to divide the number 72 by 10; which will yield a result of 7.2 – the interest rate you should be looking at which to double your money.
The resulting expected rate of return assumes compounding interest at that rate over the entire holding period of an investment.
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Years To Double
Now, if you want to find out the minimum time period in which you want to double your investment, the formula is as under:
72 ÷ i
Where ‘i’ is the interest of the FD you are eyeing.
Say, you are offered an interest rate of 7 per cent, you’ll have to divide the number 72 by 7; which gives you 7.29 approximately. So, you’ll have to stay invested for at least 7 and 0.29 years (7 years and 3.48 months; effectively 7 years and 4 months).
Can you use it elsewhere?
Yes, you can use it in any situation which has a compounded growth rate. It could be inflation, loans, or even population.
But, bear in mind that the rule gives you an approximate value, not the most accurate results. For different situations, it is best to use a different rule.
