If you are an investor, the Rule of 72 is an easy way to estimate the time it will take for your investment to get doubled, given that you get stable annual returns on it. By simply dividing 72 by the fixed interest rate, you can roughly estimate when the investment balance will double.
Interestingly, the first mention of the Rule of 72 comes from the 1494 book Summa de Arithmetica by Italian mathematician Lucca Pacioli. The book was used as a textual description for accounting studies until the mid-17th century, granting Pacioli the ‘Father of Accounting’ title.
The Rule of 72 is an easy way to calculate how long it will take to double your annual return. Investors can use this rule for rough estimates when considering financial aspects of retirement, education costs, or other long-term goals. For specific results, investors can use a more complex logarithmic formula to calculate the time it takes for doubling the investment.
What is the Rule of 72?
As we have already established, the Rule of 72 is a rule that allows investors to estimate how long it will take for their investments to double. The rule works on the assumption that a fixed annual rate of return and no additional contributions are present.
For those interested in getting a more accurate estimate of how their investments will grow over time, Rule 115 can help determine how long it will take to triple your investments. Both of these rules can help investors understand the power of compound interest. The higher the return, the less time it takes to double or triple the investment.
Using the Rule of 72
Doubling Time (number of years) = 72 / Fixed annual rate of interest
Assuming your investment portfolio has an investment balance of Rs 1,000,000, you want to know how long it will take to get it to Rs 2,000,000 at no additional cost. If the expected annual return is 7%, the simple calculation of multiplying 72 by 7 will tell that it will take 10.29 years to reach the desired double amount.
The Rule of 72 estimates the doubling time of the investment. It gives a reasonably straightforward value, primarily if you use lower interest rates instead of higher ones. It is used for situations concerning compound interest. A simple interest rate does not work very well with the Rule of 72.
The following table shows the usage of Rule of 72 in doubling your investment at different interest rates:
An elaborate example of the Rule of 72
Suppose you want to start a technology-based dairy business. As innovative as the idea sounds, the company will need a hefty investment and enormous operating costs. After contacting a large number of investors with your business pitch, you come across Private Investor XYZ. A high-net-worth individual, Private Investor XYZ agrees to invest Rs. 10,00,000 in your business.
However, the investment is subject to a fixed 12% return; otherwise, the investor will pull out. Private Investor XYZ wants to know how long it will take for their investment in your company to double in value.
Using the Rule of 72 to estimate how long the 12% compound interest investment will take to double their money, you can tell Private Investor XYZ that their investment will be doubled to Rs. 20,00,000 in: 72/12 = 6 => 6 years.
Thus, the rule is also a rapid tool for investors to weigh returns on investment with fixed gains over a long period.
Shortcomings
Even though the Rule of 72 is easy to calculate, it is not always the right approach. First of all, it requires a stable return. While investors can use the average stock market return or other benchmarks, past performance may not guarantee future successful performance prediction. Therefore, you should deeply research the expected returns and be careful with your estimates.
To quickly find out how long it will take to double your investment, use the fundamental Rule of 72 formula. However, if you are planning serious investments regarding retirement or education savings plans, consider using the logarithmic equation to ensure your assumptions are as accurate as possible. The critical thing to remember is that the Rule of 72 works best over long periods for a particular range of compound interest rates only.
