Rule-of-72
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Have you ever wondered how you can quickly estimate how fast you money or investments will grow ? Sure,you can plug numbers into a financial calculator or software programs to get an answer,but it doesn’t have to be that hard.


The Rule of 72 is the easiest way to find how much time it will take to double our investment,given a fixed annual rate of interest.

e.g. The Rule of 72 stats that the Rs.1 invested at 10% would take 7.2 years (72/10) to turn into Rs.2 or with 12% return it would take 6 years (72/12).


Time to take double = 72  / % Annual Interest

For low rate of returns the rule of 72 is fairly accurate whereas when the rate of return gets higher rule of 72 gets less precise.

Look at the following table for reference:



Rate of Return
Rule of 72
Actual # of years
Difference # of Years
2%
36
35
1
3%
24
23.45
0.6
5%
14.4
14.21
0.2
7%
10.3
10.24
0
9%
8
8.04
0
12%
6
6.12
0.1
25%
2.9
3.11
0.2
50%
1.4
1.71
0.3
72%
1
1.28
0.3
100%
0.7
1
0.3


The rule of 72 can also be used to calculate rate of return at which your money will double in given years.
e.g. To know at which rate the oney will double in 6 years.So 72/6=12 years

% annual interest require to double money = 72  /  number of years



We can also use the rule of 72 to know the effect of Inflation on our money.
-          If inflation rates go from 8% to 9%,your money will lose half its value in 9 or 8 years.
-          If college tution fees increases at 6% then the tution fees will be double in 12 years
-          If you pay 12% interest on your credit cards,the amount you owe will double in only 6 years!!
      
Thus the Rule of 72 is very useful in financial life.It helps us in planning our portfolio & achieve our financial goals.

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