21 December 2022

Banking

Rule of 72 is a simple yet useful technique used to estimate the amount of time taken to double an investment in value at a given annual rate of interest. This Rule dates back to 1494 and was referred to by Luca Pacioli in his mathematics book Summa de Arithmetica. The Security and Exchange Commission has also cited it in the grade-level financial literacy resources.

Every investor is taught this rule at the beginning stage. If you also want to know what the Rule of 72 is all about, keep reading!

The formula for the Rule of 72 is as follows:

Doubling time (number of years taken) = 72 / Annual rate of interest.

For example, if you invest Rs.10,000 and the annual rate of interest is 5%, the time taken to double your investment will be 72/ 5= 14.4 years.

To calculate the accurate time for an investment to double, following the Rule of 72 is ideal. Here, the integer 72 is divided by a given interest rate, which gives the particular time when you can withdraw the double investment amount.

However, if you want to double your investment within a particular time, you can calculate the interest rate using this Rule. Here, the integer 72 is to be divided by the expected number of years to get the particular interest rate.

Additionally, you should know that the rate of interest is a percentage of the principal that a lender charges from a borrower.

Mostly, investors and professionals use this Rule to estimate the time required for doubling an investment amount at a fixed interest rate. However, this calculation method is also used by adults who have started investing or have been investing for a long time.

Many young adults who have started investing use this formula to find the time taken for the money to double. However, this is usually done before investing to distinguish between multiple investment plans and find the best one.

Let us see an example to understand the application of the Rule of 72 in a better way:

Suppose an investor is investing ₹1,00,000 at an annual interest rate of 6%.

Hence, a particular time taken to double the investment value will be,

= (72 / 6) years = 12 years

In the table given below, you will find more examples of the application of Rule 72 for a clearer understanding of how it works:

Dividend | Annual Interest Rate | Formula | Time taken to double investment |

72 | 12% | 72 / 12 = | 6 years |

72 | 10% | 72 / 10 = | 7.2 years |

72 | 8% | 72 / 8 = | 9 years |

72 | 4% | 72 / 4 = | 18 years |

However, if we reverse this Rule, we can calculate the interest rate for a given number of years. This is explained in the following table with examples:

Dividend | Desired number of years | Reversed formula | Annual interest rate to double investment |

72 | 4 years | 72 / 4 = | 18% |

72 | 6 years | 72 / 6 = | 12% |

72 | 12 years | 72 / 12 = | 6% |

72 | 15 years | 72 / 15 = | 4.8% |

Among numerous rules used by investors, some variations of the Rule of 72 are:

The Rule of 70 is a formula for calculating the number of years taken to double the investment value in a specified rate of return. It also compares investments with different annual interest rates to determine which plan is comparatively better.

Formula of the Rule of 70 is:

Doubling time (number of years taken) = 70 / Annual interest rate.

The Rule of 69 is a simple formula for calculating the time taken to double the value of investments if the interest rate is compound. However, due to its dependency on compounding, it might not be accurate, and the process can get hectic.

Formula of the Rule of 69 is:

Doubling time (number of years taken) = 69 / Annual rate of interest.

The Rule of 69.3 is an easy method of estimating an investment’s doubling time at a given interest rate. However, this Rule is applicable to compound interest rates and thus opposes simple interest rates. As a result, this Rule gives more accurate results with a lower interest rate; as the interest rate increases, it loses its accuracy.

Formula of the Rule of 69.3 is:

Doubling time (number of years taken) = 69.3 / Annual interest rate.

Some of the primary advantages of this Rule are:

- It is an instant method of calculating the years needed to double an investment value by an investor.
- This logarithmic formula can adjust an investor’s position and risk exposure accordingly.
- It helps understand the effect of compound interest on investments and gives a clear idea about the holding period.
- This Rule also helps to distinguish between two financial instruments quickly and decide where to invest.
- It can be applied to calculate growing market factors such as investment, GDP, population rate, inflation, etc.
- This Rule can also provide plans for college funding, house or car funding, vacation planning and, similarly, retirement funding.

The limiting disadvantages of this Rule are:

- This Rule is mostly accurate for a low-interest rate ranging between 6-10%. If interest rates are higher, then there is a chance for an estimated value to fluctuate.
- It can only provide time estimation when the value of an investment is doubled at a fixed interest rate but cannot give information regarding volatile investments.
- If the rate of return changes due to any uncertain factor, this Rule becomes unusable and void.
- This Rule does not work in the case of investments with a changing return rate and for investments having simple interest rates.

Other than giving so many advantages, the Rule of 72 in finance can also calculate return rates on loans and credit cards. Its popularity is because it can cover complex calculations within minutes. Thus, it is a shortcut method of calculating the time required for an investment to double.

Now that you have calculated how to double your money, start investing in various funds offered by Navi Mutual Fund. Download the Navi App now!

**Ans:** To find the interest rate for doubling your money in 4 years, you can use the Rule of 72. However, the estimated rate of interest will be 18% to double any amount within a given year.

**Ans:** Yes, it is possible to check the doubling time of any amount using the Rule of 72. This is because, in this calculation, the sum of an investment amount is not working. So instead, the given rate of interest and time are used to calculate this respective estimation.

**Ans:** To find the time taken to double a sum in 4 years, you can use the Rule of 72. Here, the approximate time will be 8 years to double any amount invested within a given year.

**Ans:** The Rule of 72 works best when the interest rate ranges between 5 and 12 percent. However, to calculate a lower interest rate, if you drop the value to 71, the result will be more accurate. Similarly, to calculate interest for a higher return rate, you should increase this value to 74 to get a more accurate result.

Before you go…

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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.

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