What is Thumb Rule 72 and how it helps to double your money?
What is Thumb Rule 72 and how it helps to double your money?
You might be investing in several investment options. However, you might get doubt how many years it would take to double your investment. There is another situation where you invested a lump sum in mutual fund schemes that offers 12% annualized returns. You might be wondering by when your money would get doubled. If you are one among such investor, Thumb Rule 72 can help you. Thumb Rule 72 can also help you to identify the investment option where you can achieve your goals faster. What is Thumb Rule 72? How the Rule of 72 would help you to double your money?
What is Thumb Rule 72 / Rule of 72 in simple terms?
Rule of 72 in simple terms is the process of determining how long your investment would take time to double your money based on a fixed rate of return. Rule of 72 formula is simple. You need to divide such fixed interest rate or return with number 72.
Rule of 72 explained with an example
Here are few examples of determining how Thumb rule 72 works.
1) If you are investing in an investment option that has a fixed rate of 7.2%, the formula is 72/7.2 = 10. Means it would take 10 years to double your money.
2) If you are investing in an investment that has a annualized return of 12%, the formula is 72/12 = 6. Means it would take 6 years to double your money.
3) If you have investment, which can fetch you 18% annualized return, the formula is 72/18 = 4. Means it would take 4 years to double your money.
Benefits of Thumb Rule 72
Here are 5 things the Rule of 72 can determine.
1) You can apply fixed rate of interest or return and know in how many years you can double your money.
2) You can also use in a reverse way by applying number of years. You can divide 72 by a number of years to know how much returns or interest rate you may need to get to double your money. E.g. If you want to double your money in 5 years, divide 72 by 5 = 14.4. Means you need to get 14.4% annualized returns to double your money.
3) You can invest in right investment option based on your financial goals. E.g. If you want to invest Rs 10 Lakhs and to get 20 lakhs in 10 years. Your goal is 10 years, hence 72/10 = 7.2%. Means even if you invest in safe bank FDs at 7.2%, you would be still able to create Rs 20 Lakhs wealth at 10 years (goal is double).
4) You can invest in right investment option instead of just going with the crowd.
5) Even non financial savvy would be able to understand this simple logic an we don’t need excel or calculators to know this thumb rule.
How Thumb Rule 72 can help you to double your money?
Some investors think, does money double every 7 years. Rule of 72 helps you to know how many years it might take to double your money based on fixed return. It also helps you to identify investment option based on your goal. Here are few quick ways where rule of 72 would help you to double your money.
1) If you want to double your money through bank FDs that offers between 7% to 7.5%, the time taken can be quickly arrived with 72/7 or 72/7.5. Means you need to invest for 9.6 years to 10.2 years to double your money. Are you okay with this? If not you need to go to other investment options to reduce to double your money faster.
2) If you want to double your money by investing lump sum in mutual funds, you can quickly check with rule of 72. Generally, mutual funds offer 12% to 18% annualized returns depending on the type of mutual funds you are investing. Based on this formula 72/12 or 72/18 = 6 years or 4 years. Means if you invest in a diversified portfolio of mutual funds where you can earn 12% returns (72/12 = 6), your lump sum investment can double in 6 years. If you are investing in sector funds or high risk, high return mutual funds that can fetch you 18% returns (72/18 = 4), you can double your money in 4 years.
3) You want to invest your money in non equity investment options other than bank FDs, one can think of Secured NCDs. These NCD bonds now offer between 9% to 11% coupon rates depending in the NCD and company credit rating. E.g. Muthoot Finance NCDs are open almost every quarter that offers 10% interest (72/10 = 7.2) and your money can double in 7.2 years. The reference given here about Muthoot Finance NCDs is just an example and not a recommendation to invest.
4) There are several low risk individuals who want to invest in safe investment options like PPF. The current PPF interest rate is 7.9%. Based on this thumb rule (72/7.9=9.1), it would take 9.1 years to double your money. You can review whether such duration is okay for you, if not move to another safe investment option.
Rule of 72 Chart – Explained with 2 examples
How accurate is the Rule of 72?
Thumb rule 72 is not 100% accurate. It might show some variation. E.g. let us check that one would get 72% returns, then the formula is 72/72=1. But in reality one would get only 72% and not 100% in 1 year. This rule helps you to compute without any excel or calculators and it can be considered as some quick estimate.
Some FAQs about Rule of 72
1) What interest rate will double your money in 5 years?
Many investors keep asking on this blog saying, can I double my money in 5 years. If you want to invest in lumpsum and double your money in 5 years, you can use the rule of 72 which tells you 72/5=14.4 which means, you need to get 14.4% annualized returns to double your money. You need to select a diversified portfolio of mutual funds to achieve this target.
2) How many years FD would double?
This would depend on the rate of interest. If you are investing in bank FD that are offering 7.2% interest rate, based on the Thumb Rule 72 formula (72/7.2=10), it would take 10 years to double your money. Alternatively, there are companies FDs that offer 10% interest rates where you can double your money in 7.2 years (72/10 = 7.2).
3) Does the Rule of 72 really work?
As indicated above, rule of 72 is not 100% accurate. It gives an estimated no of years, by which your investment would get doubled based on a fixed rate of return.
4) Who created the rule of 72?
Rule of 72 is discovered and created by Albert Einstein.
5) Does money double every 7 years?
In good olden days Post office used to double your money in 5 years or 7 years. Hence, many investors keep asking, does money double every 7 years. If you really want to double money in 7 years, you can use thumb rule 72 (72/7 = 10.3). You need to invest in an investment option that fetches you 10.3% annualised returns to double your money in 7 years.
6) What interest rate will double money in 10 years?
If you want to invest in lumpsum and double your money in 10 years, you can use thumb rule 72 which tells you 72/10=7.2 which means, you need to get 7.2% annualized returns to double your money. You have several investment options like bank FD, post office FD, equity mutual funds that can easily help you to achieve this goal.
7) What is the easiest way to double your money?
One of the easiest and safest way to double your money is investing in bank FDs or post office FD schemes which offers between 7% to 7.5% interest rates where you can double your money in 9 years to 11 years time frame. While there are equity mutual funds and NCDs, but these are high risk.
8) How can I double my money in bank?
Banks are not only offering FDs these days, but even post office saving schemes too. You can approach any bank that is offering highest FD rates and which can help you to double your money faster. It could be bank FD, KVP, NSC, PPF etc.,
Conclusion: Thumb Rule 72 helps you to know how long it would take to double your money based on fixed interest rate or return. It goes one step ahead and tells you in which investment option you should invest if you have a specific financial goal to achieve with fixed investment. This way, you are sure to achieve your financial goal even though you might not be financially savvy.
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