E14 Rule of 72

Want to figure out how fast you can double your money?

In this episode Anmol explains you how to use the “Rule of 72” to approximate the number of  years it will take for your money to double. He also explains how to use this rule to determine what returns you need to double your money in a certain number of years!

This is a practical eye opener of you so you don't have to fall for gimicky promotions from people offering you money doubling services.

Are there any burning questions giving you sleepless nights? Write to us: anmol@7prosper.com

Disclaimer: This podcast is for educational purposes only. Anything said should not be construed as advice.

Transcript:


You must have definitely heard about Simple Interest and Compound Interest.


When you invest your money which gives you a compounded return, and you want to know how much time it will take to double your money, you can either sit with a calculator and calculate using the Compound Interest formula, or if you are sitting with any agent or sitting among your friends and all of you are engaged in a casual conversation and you want to determine how much time it will take to double your money, you can use the "Rule of 72".


"Rule of 72" implies that, if you have invested your money somewhere, lets say, you have invested in a Fixed Deposit which is giving you a return of 6%. Then you divide 72 by the rate of return. So, 72 divided by 6 which is 12. It will take 12 years to double your money at 6%.


Now we have chances of getting 10% returns on investing in Mutual Funds. So the time taken to double the money will be 72 divided by 10 which comes up to be around 7.2 years.

We can use this rule in another way.

For example, if you want to know what should be the rate of return to double you money in 5 years, then divide 72 by the number of years. The number that you get is the rate of return that you require to double your money.


So if you want to double your money in 5 years, then 72 divided by 5, which is 14.4%. So we need a return of 14.4% to double the money in 5 years. If anyone says that your money will double in 3 years, then you can quickly calculate, how much rate of return is required for that, and that's going to be 72 divided by 3 which is 24% per annum. So, in today's date, it is very unlikely to get a return of 24%.

So you will be able to quickly determine that this is an unrealistic figure being promised to you.


We often hear about the "Rule of 69" too along with the "Rule of 72".


"Rule of 69" is also the same. Just that instead of 72, you use 69. Mathematically, "Rule of 69" is more accurate. But you don't have to worry about it. When we talk about investments giving us a return of around 4% to 20%, for this range "Rule of 72" also gives us more or less accurate results.

72 is used instead of 69 because it can easily be divided by many numbers.


72 can be easily divided by 2, 3, 4, 6, 8, 9, 12 and 18, whereas, it is not that easy to divide 69 by so many numbers.


So feel free to use the "Rule of 72" whenever you have to make some quick calculations but remember it's a rule of thumb which gives you approximate results.
To know the exact calculations, you should use a calculator.

This was your host Anmol Gupta for the show "Money Ki Baat".

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