The Rule of 72 is an easy finance instrument that is used to determine the time it would take for an investment to double in terms of its value through interest payments, given a particular rate of interest. It is a simple calculation formula of dividing 72 by the annual interest rate.
The Rule of 72 is comparatively an accurate measurement primarily when using lower interest rates rather than higher ones. A simple interest rate does not work well with the Rule of 72 and the below table demonstrates the difference between the Rule of 72 calculation and the actual number of years required to double your investment value.
The Rule of 72 is as follows:
One can use the Rule of 72 to determine to
- Determine the Doubling Period
- Determine the Growth Rate
- Determine the Exponential Loss
Rule of 72 formula to determine the doubling period
Let R x T =72. R is rate of growth (the annual interest rate) and T is the time it takes to double the amount value (Time is considered in years).
Input a value for R and T. If the Rate of Interest is 5% for doubling Rs 1000 then as per the Rule of 72:
If R=5, we get 5 x T= 72
T= 72/5= 14.4 years
This shows that it takes 14.4 years to double Rs 1000 at an interest rate of 5%.
Rule of 72 formula to determine the Growth Rate
Let R x T= 72 and T=10 years
Here R refers to the rate of interest and T refers to the time
R x 10= 72
R = 7.2%
This shows that you will need an interest rate of 7.2% to double your investment value money in ten years.
Rule of 72 formula to determine the Exponential Loss
This is to determine the time it would take to lose half your money during the inflation times. For that let’s take the value of T as T=72/R. Let’s input the value for R as 5% so the result becomes:
This goes to show that it takes 14.4 years for your money to lose its purchasing power in a period of 5% inflation.
Rule of 72 to determine the rate of loss over a given period
R= 72/T. Let’s take the value of T as 10 years, so the calculation of rate of loss will be
Hence the Rate of loss over a period of 10 years becomes 7.2%
The Rule of 72 is a straightforward tool that investors can use to estimate the rate of interest as well as the time it will take to double or lower their investment money.