While investing, one of the investors’ main concerns is when their investments will get doubled. Also, we have heard plenty of investors asking how much money they’ll be able to accumulate in 3 years or 5 years. Apart from these, there are many other concerns of investors, such as at which speed their money will grow. This blog will cover a few aspects that will help you clear such doubts.
Rule Of 72
It is one of the basic rules of finance used by investors and fund managers. The rule of 72 helps in calculating two aspects of investments:
1. The period your investments may take to double the amount and,
2. The rate of return on your investments will require you to double the amount invested
You can calculate either of the things using the rule of 72 of finance.
The formula for the rule is: Time is taken to double the amount = 72 / percentage return rate
Let’s understand it better with an example. Let’s say the investment option bears a 10% rate of return annually. Then the time your investments would take to double the amount invested would be 72 / 10 = 7.2 years or 7 years two months. Let’s understand otherwise. Suppose you want to double your investment amount in 8 years. Then you should look for securities that give at least 72 / 8 = 9% rate of return.
Investors or fund managers can use the rule to compare different types of securities, such as FDs and stocks, and choose the ones that align with their goals. And you must know that this rule only applies to cases with simple interest rates.
Rules of 114 and 144
The rules of 114 and 144 are used to compute how long investments may take to triple and quadruple themselves, respectively. For example, an investment with an 8% rate of return may take:
– 9 years to double itself (72 / 8)
– 14.25 years to triple itself (114 / 8)
– 18 years to quadruple itself (144 / 8)
Or, if you wish to double your investment in 10 years, you may look for options that give a 7.2% rate of return. But let’s say your friend A wishes to triple his investment in 10 years. He must look for securities generating at least an 11.4% rate of return. A friend B willing to quadruple his investment amount in 10 years, will look for investments generating at least a 14.4% rate of return annually.
100 minus age rule
This rule is widely used to determine asset allocation based on the investor’s age. It tells you how much to invest in equity and how much to put in debt based on your age. You must subtract your age from 100, and the percentage you get must be put in equity. For example:
Investor’s age 30 years: 70% in equity and 30% in debt.
Investor’s age 40 years: 60% in equity and 40% in debt
Emergency Fund Rule
The emergency fund rule is as important as other rules as it allows you to save for unexpected situations. Uncertain situations can affect your life financially and emotionally. Hence, you must be prepared in advance by following this rule. The emergency fund rule states that you must put three to six months of your monthly expenses towards an emergency fund. But make sure the fund you choose is highly liquid; otherwise, it’s no use.
10% Investment rule
According to this rule, beginner investors must start by investing 10% of their salary or income and slowly add 10% every year. Hence, it develops a habit of investing and benefits investors by compounding.
