What is Rule of 72 and how it is useful to double your money?
You might be investing in various investment options. However, you may be wondering by when you would double your money. You might also wonder that if you want to achieve a target of doubling your money in specific years, how much return you need to get and where to invest. This is where Thumb rule of 72 would help you. Rule of 72 or Thumb Rule of 72 indicates how quickly you can double your money. This rule can also be used to check where to invest your money if you want to double in say 5 years. What is this Rule of 72 all about? How should you use this Rule of 72 effectively to gain maximum benefit?
What is the Rule of 72 all about?
Rule of 72 or Thumb Rule 72 indicates how quickly you can double your money. Divide 72 with the interest rate or return from an investment option and the number derived is the no. of year that it would take to double your money.
Rule of 72 explained with a few examples
- If you invest in a bank FD which gives 8% interest, simply divide 72 / 8 = 9. Means if you get 8% interest, you can double your money in 9 years.
- If you invest in a mutual fund where you expect 12% annualized return, simply divide 72 / 12 = 6 years. Means if you get 12% return, you can double your money in 6 years.
- If you invest in an NCD offering 13% annaualised return, simply divide 72/13 = 5.5 Years. Means if you get 13% return, you can double your money in 5.5 years.
Is there any other benefits of using the Rule of 72?
While the main purpose is to know when your money would be double, the other main killer purpose is to divide with your target years of goal so that you know how much return you need to get.
Explained with a few examples on how to use rule 72 to know the investment options
In the above formula for computing years, you are using interest or return. Here you do exactly opposite. For computing return or interest, you need to divide 72 with years of investment.
- If you want to double your money in say 3 years. Divide 72/3 = 24. Means if you can get 24% annualized return, your money can be doubled in 3 years.
- If you want to double your money in say 5 years. Divide 72/5 = 14.4. Means if you can get 14.4% annualized return, your money can be doubled in 5 years.
- If you want to double your money in say 7 years. Divide 72/7 = 10.3. Means if you can get 10.3% annualized return, your money can be doubled in 7 years.
Benefits of Rule of 72
- You can compute on how many years your money would get doubled if you know the interest rate / returns.
- You can compute how much interest / return you need to get if you want to invest for a specific number of years.
- You can invest in possible investment options to ensure you achieve your financial goals well ahead of time.
- If you are investing in bank FD’s offering 8% to 10% returns, your money would get doubled in 7 to 9 years time frame. If you are investing in top mutual funds where annualized returns are between 12% to 14%, you can double your money in 5 to 6 years time frame.
- If you want to double your money in say 8 years (72/8=9), you can invest simply in a bank FD offering 9% returns. However, if you want to double your money in 3 years (72/3=24), you need to get 24% returns which may be possible in stocks, mid-cap funds or sector based funds. If you are a high risk taker, you can choose these options.
- Very useful for non-finance individuals as no need to do complicate calculations.
Conclusion: I felt Thumb Rule of 72 is very useful formula for every investor. You do not need a pen, paper, calculator or computer to know by when your money can be doubled with this simple thumb rule. I felt this thumb rule 72 is very useful, especially in identifying the right investment option to achieve the target well ahead of time.
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What is the Rule of 72 and how it would help to double your money