Double your money.
The “rule of 72” is a method of estimating how long it will take compounding interest to double an investment. Just divide 72 by interest rate, and get number of years to get your money double.
If the rate of interest is 9%, simply divide the number 72 by 9% and the answer is 8. Thus it will take 8 years to double your money if you invest at 9% p.a. rate of interest.
72 / =
We can use this rule in reverse to know the rate of interest needed to double your money to achieve your set goal. This is used as a thumb rule in many ways.
If you have 250k today and you need 500k in 5 years. Just divide the number 72 by 5, the answer is 14.41%. Thus you need a type of investment avenue, where you earn at least 14.41% p.a. as the rate of interest/returns to double your investment amount in 5 years.
This ‘Rule 72’ helps you to understand about inflation also. It helps you to calculate the amount of time it will take for inflation to make the real value of money half. Let’s say the present inflation is 5.5%. When you divide 72 by 5.5% the answer is 13.09 years. That is to say, if you have 100k in your kitty today, it would take around 13.09 years for the value of the money to be halved.
While this calculation is relatively simple with a calculator or spreadsheet, the rule of 72, which was derived before the 14th century, is still a quick, mental calculation for the effects of compound interest.
Hope it helps you in your day to day investments and other finance-related activities.
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