Use "Rule of 72" to double your investments

Numbers aids in our day-to-day transactions and decisions. Nevertheless, 72 is a number that 

simplicities our financial investment decisions.

How does the magic of 72 work?

Albert Einstein once said that, “Compounding is the eighth wonder of the world”, and the Rule of 72 is the simple way to test the power of compounding on your investments.

The “Rule of 72” is a simplified way to find out how long your investments will take to double up, the only condition is to provide with a fixed annual rate of return. You have to divide 72 by the annual interest rate of your investments and the result is rough estimate of years your money will take to double up.

Formula:

How to use it?

If you have invested amount of Rs.1 lakh in funds that gives you an approximate return of 9%, then let’s see how many years will it take to get Rs.2 lakhs (risk-free returns)

  

Hence, your 1 lakh Rs. will become 2 lakhs after approximate 8 years with a rate of return of 9%.

                    

You can, not only use this rule to find the period for doubling up of your investments, but also to find the number of years it will take you to achieve your financial target amount.

Let us understand this with the help of the following example.

Disha has 5,00,000 Rs invested across different types of investment instruments which is estimated to give average yearly return of 8 %.Now, She wants to know, when will her investment returns sum up to 20,00,000 Rs, so that she can achieve a milestone of her financial goals.

Let us use the magic of 72 to find it for Disha.

   

Disha’s 5 lakhs will become 10 lakhs in 9 years.

And this way 10 lakhs will double up to 20 lakhs in the next 9 years with rate of return being constant.

Hence Disha will have 20,00,000 in her hand from her investments after 9+9, i.e 18 years.

Can 72 help me in any other way?

“The Rule of 72” also assists you to estimate the rate of return required on your investments, which eventually helps you  in achieving your financial objective after given number of years.

Gunjan has Rs. 8,00,000 today and requires Rs. 16,00,000 after 6 years  to buy a proposed small property.

Using the “Rule of 72”

So, Gunjan will have to invest Rs. 8,00,000 in an instrument or across a group of savings instruments that will give an approximate average return of 12 % per annum to reap Rs.16,00,00 after 6 years.

Does Rule of 72 apply only for investments? Can it be used for other calculations?

The answer to this is “Yes”. “Rule of 72” also helps to find the value of our current capital or our future investment returns in future given the rate of inflation.

If you have 30 lakhs today or are going to receive 30 lakhs from your investments after 10 years, then what will be the value (or purchasing power) of your amount after 10 years, given an average inflation rate of 6%? By using “Rule of 72” in reverse, we can understand the power of inflation.

Therefore, your amount will have half of its existing value, after 12 years. So, if you are going to receive 30 lakhs after 12 years then it will have the purchasing power which is equal to that of Rs.15 lakhs today.

Thus, “Rule of 72” is an effective tool to aid your investment decision-making process, which leads you to achieve your financial goals, as well as to estimate the future value of your capital or investments.

Note:

“Rule of 72” is just a rapid estimate and is not necessarily entirely accurate.

The actual time required to double your investment may vary based on various factors like change in rate of return over time, type of investment instrument, way of interest application and possible tax implications.

Even so, “Rule of 72” is a quick and helpful way to carry out your investment related decisions.

Comment below, if this post was helpful.