The Rule of 72 in finance is a quick way to calculate the time it will take to double an investment amount at a fixed annual rate of returns.
You can use spreadsheet programs such as excel sheets and calculators to accurately calculate the time it takes to double your invested money. However, the Rule of 72 can be used for mental calculations to quickly give you an estimate value.
The Rule of 72 formula is: - Years to Double = 72/Interest rate
The fixed rate of return on an investment is the interest rate
Take, for example:
An investor who invests Rs. The annual interest rate for an investor is 4% if he invests Rs.
72/4 = 18 Years.
Using a logarithmic formula, the Rule of 72 can be used to estimate how many years it will take to double an investment.
It can also be used to increase values such as investments, inflation, or GDP. Rule 72 can also be used to calculate the population.
It can be used to understand the impact of compound interest on investments.
The Annual Percentage yield for standard savings accounts in most banks is around 0.06 percent. It would take approximately 800 years to double your investment at this rate.
How can you shorten the time it takes to double your investment?
1. A high-yield savings account offers an interest rate of around 2.5 percent and allows you to keep some of your savings.
2. Stocks are a good option for your money. They offer high returns and low risk. Stocks can help your portfolio achieve greater returns. S&P's average return is around 7 percent.
Limitations to Rule 72
1. Rule 72 applies to low-interest rates between 6 percent and 10 percent. For interest rates that are outside of this range, the Rule must be adjusted by subtracting 1 for each 3-point divergence.
2. It cannot give an exact estimate of a fixed return, but it can provide an estimate for volatile investments.
The Rule of 72 can be used to calculate interest rates for credit cards, car loans, home loans, student loans and other types of borrowing. It will show the length of time it will take the lender to double the amount. These calculations are not easy for beginners. Rule 72 allows you to quickly calculate how long it takes for an investment to double.