Discover the Rule of 72 for smart investing with examples, utilizing a powerful financial calculator to unlock the secrets of compounding returns and achieve financial success.
Every individual investor requires reliable projections of how much their investments will grow in the future. Professionals utilize complex models to address this question, but the rule of 72 is a simple technique that anybody can use.
What is the Rule of 72?
The Rule of 72 is an easy method to calculate how many years it will take for an investment to double based on a yearly rate of return. It can also help figure out the compounded return on an investment for the time it takes to double.
Even though tools like calculators and Excel can calculate the exact time to double an investment, the Rule of 72 gives a quick and simple estimate. That’s why it’s often taught to beginner investors.
Who Invented the Rule of 72?
Luca Pacioli first mentioned the Rule of 72 in his 1494 mathematics book, Summa de Arithmetica. The rule’s origins before Pacioli’s book are unknown.
How does it works?
The Rule of 72 is a simple, helpful rule for calculating the number of years required to double an investment at a given yearly rate of return. In addition, it can calculate the compounded return on an investment over the period required to double it.
While calculators and spreadsheet applications such as Microsoft Excel include functions to precisely compute the period required to double the invested money, the Rule of 72 can be used to easily measure an approximate amount. As a result, the Rule of 72 is frequently taught to new investors because it is simple to understand and compute.
The Rule of 72 is an easy method for new investors to learn.
- With a 6% interest rate, money doubles in 12 years (72/6).
- To double money in 10 years, you need a 7.2% interest rate (72/10).
- If a country’s GDP grows at 3% annually, it takes 24 years (72/3) to double.
- A 2% growth rate doubles the economy in 36 years, while 4% does it in 18 years. Faster growth benefits from technological advances.
The 72 rule applies to inflation or interest too:
- At 3% inflation, money loses half its value in 24 years.
- Tuition prices double in 14.4 years (72/5) if they increase at 5% per year. With a 15% credit card interest, debt doubles in 4.8 years (72/15).
A seemingly small 1% change in inflation or GDP growth greatly impacts forecasts because of the Rule of 72.
Understanding the Rule of 72
The Rule of 72 helps predict that if you invest Rs. 10 at a 10% annual fixed interest rate, it will become Rs. 20 in about 7.2 years (72/10 = 7.2). In reality, it takes about 7.3 years for a 10% investment to double.
The Rule of 72 is quite accurate for normal returns. The image below shows a comparison between the numbers given by the Rule of 72 and the actual years needed to double an investment.
| Rate of Return | Rule of 72 | Actual # of Years | Difference (#) of Years |
| 2% | 36.0 | 35 | 1.0 |
| 3% | 24.0 | 23.45 | 0.6 |
| 5% | 14.4 | 14.21 | 0.2 |
| 7% | 10.3 | 10.24 | 0.0 |
| 9% | 8.0 | 8.04 | 0.0 |
| 12% | 6.0 | 6.12 | 0.1 |
| 25% | 2.9 | 3.11 | 0.2 |
| 50% | 1.4 | 1.71 | 0.3 |
| 72% | 1.0 | 1.28 | 0.3 |
| 100% | 0.7 | 1 | 0.3 |
Conclusion
The Rule of 72 is beneficial for new investors as it demonstrates the power of compounding when building long-term wealth. However, it’s mainly used for quick calculations and isn’t a substitute for detailed study or a thorough financial plan.
Before investing, it’s wise to do thorough research to know the possible risks of any investment and how these risks impact expected returns. Don’t forget to consider fees, taxes, and additional costs.
