- Home
- Stock Market Guide
- Generic
- Rule Of 72
- Generic
- Rule Of 72
5paisa Research TeamDate: 19 May, 2023 03:44 PM IST
Want to start your Investment Journey?
+91
Content
- What is Rule of 72?
- About Rule 72?
- How can you use the Rule of 72?
- Time (Years) to Double an Investment
- Rule of 72 Formula
- Example of the Rule of 72
- Deriving the Rule of 72
- Rules of 72, 69.3, and 69
- Advantages and Disadvantages of Rule of 72
- Rule of 72 vs 70
The Rule of 72 is a simple yet powerful financial tool that helps investors estimate the time it takes for an investment to double in value, given a fixed annual rate of return. This quick calculation method provides a clear vision of an investment's potential growth and assists in setting achievable financial goals.
By using the rule of 72, investors can gain a better understanding of the power of compounding interest and make informed investment decisions. In this article, we will delve into the rule of 72, how it works, and how it can be used to make better investment decisions. Whether you are a beginner or an experienced investor, understanding the rule of 72 is essential for maximising your investment returns.
What is Rule of 72?
The rule of 72 meaning refers to a simple mathematical formula used to estimate the time it takes for an investment to double at a given interest rate. This rule is based on the mathematical principle of compounding interest and is particularly useful for making quick approximations without the need for complex calculations.
By dividing 72 by the annual rate of return, the Rule of 72 provides investors with a rough estimation of the number of years it takes for their investment to grow twofold. The simplicity of this concept makes it an invaluable tool for investors and financial planners alike, allowing for a general understanding of an investment's potential growth and helping in the decision-making process.
About Rule 72?
By dividing the number 72 by the annual rate of return (expressed as a percentage), the Rule of 72 provides a rough estimation of the number of years needed for an investment to grow twofold. Although not an exact method, this rule offers a reasonably accurate approximation, especially for interest rates between 6% and 10%. It is important to note that the Rule of 72 assumes a constant rate of return and uninterrupted compounding.
The practicality of the Rule of 72 lies in its ability to simplify complex financial calculations, thus making it easier to compare and evaluate different investment options. By providing a general sense of how long it will take for an investment to double, it assists investors in making informed decisions and planning for future financial goals. Moreover, the Rule of 72 can also be applied to other areas, such as understanding the impact of inflation on purchasing power or gauging the effects of economic growth.
How can you use the Rule of 72?
To use this rule, simply divide 72 by the annual rate of return (expressed as a percentage), and the resulting number will give you an approximation of the number of years needed for the investment to grow twofold.
For instance, if you are considering investing in a financial instrument that offers an 8% annual rate of return, dividing 72 by 8 will yield 9 years as the approximate time needed to double your investment. This mental shortcut allows you to easily compare different investment opportunities and make informed decisions about where to allocate your resources.
The Rule of 72 can be applied in other financial contexts as well. For instance, you can use it to understand the impact of inflation on your money's purchasing power. By dividing 72 by the annual inflation rate, you can estimate the number of years it will take for the purchasing power of your money to be halved.
Time (Years) to Double an Investment
Here’s a table that compares the results obtained using the Rule of 72 with the actual time it takes for an investment to double, based on different annual rates of return:
Annual Rate of Return (%) | Rule of 72 (Years) | Actual Time (Years) |
2 | 36 | 35.00 |
4 | 18 | 17.67 |
6 | 12 | 11.90 |
8 | 9 | 9.01 |
10 | 7.2 | 7.27 |
12 | 6 | 6.12 |
This table demonstrates that the Rule of 72 provides a close approximation of the actual time needed for an investment to double at various rates of return. While not 100% accurate, the rule offers a quick and easy way to make estimates that are generally reliable for financial planning purposes.
Rule of 72 Formula
The Rule of 72 is a formula used to estimate the number of periods required to double an investment's value, based on a given interest rate per period. The formula is as follows:
t = 72 / r
Where,
t = number of periods required to double an investment's value
r = interest rate per period, as a percentage
Example of the Rule of 72
Here’s a rule of 72 example:
The Rule of 72 can be illustrated by taking an investment with a fixed annual interest rate of 8%. Dividing 72 by the interest rate of 8 gives the number of years required to double the investment, which in this case is 9 years. So, if an individual invests Rs. 10,000 at an 8% annual interest rate, they can expect the investment to double to Rs. 20,000 in approximately nine years. The Rule of 72 provides a quick and easy way to estimate the number of years required to double an investment based on the given interest rate.
Deriving the Rule of 72
The Rule of 72 is a quick and simple method to estimate the time required to double an investment's value. It is derived from the compound interest formula, which is used to calculate the future value of an investment over a period of time. The formula for compound interest is:
A = P (1 + r/n)^(nt)
Where: A = Future value of the investment P = Principal amount r = Interest rate n = Number of times the interest is compounded per year t = Time in years
To derive the Rule of 72, we can simplify the above formula by assuming that the interest rate and compounding period are constant. In this case, the formula becomes:
A = P (1 + r)^t
By applying natural logarithm to both sides, we obtain:
ln A = ln P + t ln (1 + r)
Using the first-order Taylor series approximation, we can approximate ln (1 + r) as r. Therefore, the formula becomes:
ln A ≈ ln P + r t
Rearranging this equation, we get:
t ≈ ln 2 / r
This is the Rule of 72, where t represents the number of years required to double an investment's value, and r is the interest rate per year.
Rules of 72, 69.3, and 69
The Rule of 72, Rule of 69.3, and Rule of 69 are all formulas used to approximate the number of years it will take for an investment to double in value based on a given interest rate.
● The Rule of 72 states that by dividing 72 by the annual interest rate, you can estimate the number of years required for an investment to double.
● The Rule of 69.3 is a more accurate formula for higher interest rates and is calculated by dividing 69.3 by the interest rate.
● The Rule of 69 is another approximation formula used for continuous compounding and is calculated by dividing 69 by the interest rate.
These rules are helpful tools for quickly estimating the potential growth of an investment.
Advantages and Disadvantages of Rule of 72
The Rule of 72 is a quick and easy way to estimate the time required to double an investment. It has several advantages, such as being easy to understand, apply and calculate, making it a useful tool for investors. It can be used to compare different investment options and help investors make informed decisions about where to put their money.
However, the Rule of 72 is based on a few assumptions that may not always be accurate, such as a constant rate of return and compounding period. It also does not take into account taxes, inflation, and other factors that may impact investment returns. Therefore, it is important to use the Rule of 72 as a rough estimate and not rely solely on it for making investment decisions.
Rule of 72 vs 70
The difference between the two is that the Rule of 72 uses the number 72, while the Rule of 70 uses the number 70. The Rule of 70, which is based on the natural logarithm of 2, is a more precise formula with an approximate value of 0.693.
This means that the Rule of 70 will produce more precise results when calculating the time it takes for an investment to double. However, the Rule of 72 is simpler to use and provides a close approximation that is easy to remember.
More About Generic
- What Is FD Laddering?
- What Credit Score is Needed to Buy a House?
- How to Deal with Job Loss?
- Is 750 a good credit score?
- Is 700 a Good Credit Score?
- What is Impulse Buying?
- Fico Score vs Credit Score
- How to remove late payments from your credit report?
- How to Read Your Credit Card Statement?
- Does Paying Car Insurance Build Credit?
- Cashback vs Reward Points
- 5 Common Credit Card Mistakes to Avoid
- Why Did My Credit Score Drop?
- How to Read a CIBIL Report
- How Long Does It Take to Improve Credit Score?
- Days Past Due (DPD) in CIBIL Report
- CIBIL Vs Experian Vs Equifax Vs Highmark Credit Score
- 11 Common Myths about CIBIL Score
- Tactical Asset Allocation
- What is a Certified Financial Advisor?
- What is Wealth Management?
- Capital Fund
- Reserve Fund
- Market Sentiment
- Endowment Fund
- Contingency Fund
- Registrar of Companies (RoC)
- Inventory Turnover Ratio
- Floating Rate Notes
- Base rate
- Asset-Backed Securities
- Acid-test Ratio
- Participating Preference Shares
- What is Expenses Tracking?
- What is Debt Consolidation?
- Credit Review
- Passive Investing
- How To Get Paperless Loans?
- How To Check CIBIL Defaulter List?
- Credit Score Vs CIBIL Score
- National Bank for Agriculture and Rural Development (NABARD)
- Statutory Liquidity Ratio (SLR)
- Cash Management Bill (CMB)
- Secured Overnight Financing Rate (SOFR)
- Personal Loan Vs Business Loan
- Personal Finance
- What is Credit Market?
- Trailing Stop Loss
- Gross NPA vs Net NPA
- Bank Rate vs Repo Rate
- Operating Margin
- Gearing Ratio
- G Secs - Government Securities in India
- Per Capita Income India
- What is Term Deposit
- Receivables Turnover Ratio
- Debtors Turnover Ratio
- Takeover
- IMPS Full Form in Banking
- Redemption of Debentures
- Rule of 72
- Institutional Investor
- Capital Expenditure and Revenue Expenditure
- What is Net Income
- Assets and Liabilities
- Gross Domestic Product (GDP)
- Non-Convertible Debentures
- Cost Inflation Index
- What Is Book Value?
- What Are High Net Worth Individuals?
- Types of Fixed Deposits
- What Is Net Profit?
- What is Neo Banking?
- Financial Shenanigans
- China Plus One Strategy
- What is Bank Compliance?
- What Is Gross Margin?
- What Is an Underwriter?
- What is Yield To Maturity (YTM)?
- What is Inflation?
- Types of Risk
- What Is the Difference Between Gross Profit and Net Profit?
- What is a Commercial Paper?
- NRE Account
- NRO Account
- Recurring Deposit (RD)
- What is Fair Market Value?
- What Is Fair Value?
- What is NRI?
- The CIBIL Score Explained
- Net Working Capital
- ROI - Return on Investment
- What Causes Inflation?
- What is Corporate Action?
- What is SEBI?
- Fund Flow Statement
- Interest Coverage Ratio
- Tangible Assets Vs. Intangible Assets
- Current Liabilities
- Current Ratio Explained - Examples, Analysis, and Calculations
- Restricted Stock Units (RSU)
- Liquidity Ratio
- Treasury Bills
- Capital Expenditure
- Non-Performing Assets (NPA)
- What is a UPI ID? Read More
Learn more
Stock / Share Market Demat Account Online Trading Mutual Funds Commodity Trading Basics IPO Trading Holiday Derivatives Trading Basics Tax Aadhaar Card Pan Card Savings Schemes International Markets Loans Banking Currency Bond and Debenture Insurance
Open Free Demat Account
Be a part of 5paisa community -The first listed discount broker of India.
+91
Frequently Asked Questions
Can I double my money in five years?
The Rule of 72 suggests that an investment can double in value in approximately 7.2 years with a 10% annual return. Therefore, it is possible to double your money in about five years with an annual return of 14.4%.
What is the 7 years rule of investing?
The 7 years rule of investing refers to the general guideline that it takes around 7 years for an investment to potentially double in value. This rule is based on the assumption that the investment will generate a consistent rate of return over the period.
How to calculate rule 72?
The Rule of 72 formula is calculated by dividing 72 by the expected annual rate of return on investment. The result gives an approximation of the number of years required for the investment to double in value.
Who came up with rule 72?
The origin of the Rule of 72 is uncertain, but it is believed to have been created by mathematicians or financial experts in ancient times. Luca Pacioli, a famous Italian mathematician, first mentioned the Rule of 72 in his book “Summary of Arithmetic, Geometry, Proportions, and Proportionality” in 1494.
How accurate is the rule of 72?
The rule of 72 assumes a constant rate of return, which may not be realistic in practice. Therefore, the accuracy of the Rule of 72 depends on the stability of the investment's rate of return over time.