What Is the Rule of 72 & How Does It Help Us?

It is a simple rule of thumb that helps investors determine how long it will take for their money to double at a given interest rate. The basic idea is that you divide 72 by the interest rate you’re earning (or expect to earn) on your investment, and the answer tells you the amount of time needed to double your money.

The average return on bank deposits is currently around 7%. You’ll get approximately ten years if you divide 72 by 7. So, if you invest Rs 1 lakh in a bank deposit today, with the Rule of 72, you can assume that it will take around ten years to become Rs 2 lakhs (assuming no inflation) to grow.

It is a useful tool for estimating the duration for an investment to grow. This rule can be applied to any type of investment – not just bank deposits.

Who introduced the rule of 72?

In 1494, Italian mathematician Luca Pacioli wrote a book called Summa de Arithmetica, Geometria, Proportioni et Proportionalità. The book was about mathematics and included a section on what is now known as the rule of 72.

What is the formula for the Rule of 72?

First, 72 divided by the expected rate of return gives the number of years required to expect an investment to double. Its formula is based on an average rate over the lifetime of the investment.

Second, to calculate the expected interest rate, divide the integer 72 by the amount of money you’re investing for the number of years it takes to double it. The number of years need not be a whole number, as there are mathematical equations that recognize fractions of a year.

How to use the Rule of 72

This rule could be used to gain insight into anything that grows at a compounded rate.

You can use it to estimate the effects of inflation on your purchasing power. If you expect inflation to eat away at the purchasing power of your money at a rate of 6% per year, it will take 12 years for prices to double (72/6 = 12).

The rule can also be used to estimate population growth. If a population grows at 2% per year, it will take approximately 36 years for the population to double (72/2 = 36). This means that the population in India is expected to grow from 1 billion to 2 billion in 2051.

The advantages of the Rule of 72

The rule provides a quick and easy estimate of the time required for an investment to grow. You can apply it for any type of investment, including stocks, bonds, and real estate. Second, it can help you choose between different investments. It’s an uncomplicated method which can be used by any individual with any capital accessible today. In addition, it allows investors to calculate the time required to double their capital. Investors can take calculated risks as per their risk tolerance.

The disadvantages of the Rule of 72

• First, it favors a lower interest rate, between 6 and 10%. For higher returns, the estimated value can vary.
• It only provides an estimation, not an accurate figure.
• This rule does not apply in terms of the change in interest rate.
• The rule turns void if there is any interest rate change due to any factor.

Other Related Rules

For the rule of 72 to be effective, interest rates or rates of return must be between 6% and 10%. For every three points, the interest rate deviates from the 8% threshold. The rule can be changed when dealing with rates outside this range by adding or removing one from 72. For instance, 11% is three percentage points greater than 8% yearly compounding interest.

As a result, we can adopt the rule of 73 for more precision by adding 1 (for the 3 points higher than 8%) to 72. The rule of 74 would apply to a return rate of 14% (adding 2 for a six-percentage point increase), while the rule of 71 would apply to a return rate of 5% (dropping 1 for a three-percentage point decrease).