In finance, the Rule of 72 is a quick formula that can be used to estimate the time required to double the invested amount of money at a fixed annual rate of return.
While you can also use calculators and spreadsheet programs like excel sheets to calculate the time required to double the invested money accurately, the Rule of 72 is a good alternative for mental calculations that can give an approximate value quickly.
How to calculate the period?
The Formula for Rule of 72 is – Years to Double = 72/Interest Rate
Where the interest rate is the fixed Rate of Return on an investment
If an investor invests Rs. 10000 and the annual interest rate is 4%
The time taken to double the investment = 72/4 = 18 years.
- The Rule of 72 is a simple way of estimating the years required to double an investment’s value using a logarithmic formula.
- It can be applied to growing values like investments, inflation, and GDP. The population can also be calculated using Rule 72
- It is useful for understanding the effect of compound interest on your investments.
The Annual Percentage Yield for standard savings account in most banks is about 0.06 percent. At this rate, it would take about 800 years to double your investment.
How can you reduce the period required to double your investment?
1. You can keep a part of your savings in a high-yield savings account which offers a rate of interest of about 2.5 percent.
2. You can invest your money in stocks; some provide good returns with low risks. You can see your portfolio get more significant returns with stocks. The average return for S&P is about 7 percent.
Limitations of Rule 72:
1. Rule 72 is mostly accurate for low-interest rates in the range of 6 percent to 10 percent, for interest rates outside this range, the Rule has to be adjusted by subtracting 1 from 72 for every 3-point divergence.
2. It can only give an estimate for a fixed return; it is not accurate when it comes to volatile investments.
Rule of 72 can also be used to calculate interest rates on a credit card, car loan, home loans, or student loan. It can show how many years it will take for the lender to double the amount. For beginners, these calculations can be quite complex. Rule 72 is a shortcut to calculate the time required for the investment to double itself.