What is the Rule of 72?
The Rule of 72 is a general mathematical guideline, in financial planning, that determines how long an investment portfolio will take to double. CA Manish P Hingar said to understand how many years it will take to double your money, you can simply use rule of 72. You just need to divide the rate of return (in percentage) into 72.
As an investor, the most important concern is to find out the time by when the investment will really grow. The Rule of 72 relates to the compound interest that happens when an interest rate is applied to an initial principal, and the interest earned is reinvested. This means that the interest is earning interest upon itself.
For example, if you have an initial investment of Rs.100,000 and a 10% return rate, 72/10 years = 7.2% return required. In other words, you need a 7.2% return to 2x your money in 10 years.
To calculate how many years it takes to double your money with a given rate of return, divide 72 by the rate of return. The result is the number of years it will take to double your money.
If you want to calculate the rate of return to double your money in a given amount of time, divide 72 by the number of years it will take to double your money.
The Rule of 72 is also applied to understand the effect of certain factors on a company’s financial performance such as research and development expenses, adjusted total research and development costs, adjusted EBITDA margin, “Rule of 65” and “Rule of 72”.
Using your rate of return, the Rule of 72 is a simplified formula that measures the effect of compound interest on your investment dollars. As a general rule, when you divide 72 by your rate of return, you’ll get the approximate number of years it will take to double your money.
Math can be as straightforward or as complicated as you make it. One of my favorite (and simple) rules is the Rule of 72. It states that if you divide the number 72 by the expected rate of return, you will get the amount of time it will take to double your money.
For example, if you anticipate a 7.2% rate of return, you can divide 72 by 7.2, and the result is 10 years. This means that it will take approximately 10 years to double your money.
If you apply the Rule of 72, you will only need a 10.3% total annual return to double your money by 2030. Now, a 10% average annual return is not a given, but it is achievable with a diversified portfolio of stocks and bonds.
The Rule of 72 is a powerful way for you to grow wealth over time. Invest as early as you can to take maximum advantage.