The main motive behind investing money is to earn significant returns. But it’s often difficult to earn high returns in a short duration. And, who doesn’t wish to double their money? We all dream about doubling our investments as soon as possible. But the question is, how fast do we want to double our money? Type of investment plays a significant role in how fast you can double your money. For example, investing in stocks can double your money in the shortest duration. While investing in safer options like fixed deposits and other schemes will take longer to double your investments. Rule of 72 will help you determine in how many years your investment can double at a given rate of return. This article covers how to double your money with the rule of 72.
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What is the Rule of 72?
The rule of 72 is a simple calculation that illustrates how quickly an investment will double at a certain rate of return. Divide 72 by your annual compound interest rate to determine the number of years it will take for your investment to double. The rule of 72 is the quickest approach to determine how long it will take to double your money at a certain fixed interest rate. Even if you have no intention of doubling your money, knowing how long it would take to do so will help you estimate when you will achieve your desired portfolio size.
Compound interest calculation is a complicated mathematical computation that requires most individuals to reach for a calculator. Thus, we often struggle to determine how many years our investments can double. When it comes to the precision of this method, an annual interest rate of 8% yields the best results. However, you can use it with confidence for any percentage between 4% and 15%. Beyond these boundaries, the rule becomes too vague to be relied upon. In the end, nothing beats calculating compound interest manually.
Recommended Read: Compound Interest Formula
Rule of 72 Formula
The rule of 72 formula is as follows:
No. of years to double the investment = 72 / compound annual interest rate
How to Double Your Money with Rule of 72?
Doubling Your Wealth Within One Year
According to the rule of 72, if you wish to see your money double in one year, you must invest in avenues that offer annualized returns between 70% and 72% (72/72 = 1). Generating 70% to 72% in one year requires you to be an aggressive investor. Investing in the stock market may help you generate such high returns.
Doubling Your Wealth Over Five Years
If you pursue a medium-term objective and want your money to be doubled in 5 years, you must seek out investments that offer annualized returns of at least 14.5% (72/5= 14.4). The returns must be higher after adjusting for inflation. Mutual funds are good investment options that can help you generate such returns.
Doubling Your Wealth Within Ten Years
Similarly, if you are preparing for a long-term objective, you will need a rate of return of 7.5% (72/10= 7.2) to double your money in 10 years. Goals such as supporting your child’s college education or purchasing a home are considered long term goals. You can invest in mutual funds, debt funds, bonds, bank deposits, etc., to double your returns in 10 years.
Rule of 72 Example
The Rule of 72
The following table show some examples of Rule of 72:
|Dividend||Annual Interest Rate||Investment Doubles in (Years)|
The Rule of 72: Reversed
The rule of 72 can also be applied in reverse. By dividing 72 by the number of years in which you desire to double your money, you can determine the yearly return rate required to reach your objective. Following are some examples for you to understand the reverse scenarios:
|Dividend||Years to Double Investment||Required Annual Rate of Return|
The Rule of 72: Variations
Although the rule of 72 provides an excellent level of simplicity, a few easy mathematical techniques can be used to improve its precision. Remember that an interest rate of 8% is the most realistic simulation for the rule. For every three-point deviation from 8%, “72” can be adjusted by one point in the direction of the interest rate change. Therefore, if the rate is 5%, you would reduce the rule to 71. Let’s understand this with a few examples to get more clarity:
|Interest Rate||Difference From 8%||Adjusted Dividend||New Calculation||Investment Doubles in (Years)|
|14%||6%||72 + 2 = 74||74 ÷ 14||=||5|
|11%||3%||72 + 1 = 73||73 ÷ 11||=||7|
|5%||-3%||72 – 1 = 71||71 ÷ 5||=||14|
Rule of 69.3 has proven to provide more accurate estimates for those who utilize continuous compounding. Though using 69.3 is unlikely to significantly increase the interest-earning potential of an investment account. However, it can make a slight difference.
Using the rule of 72, you can estimate how long it will take to double your money at a given rate of return. If you know the present balance and the typical rate of return, you may estimate how long it will take for your investments to double.
This is an extremely valuable resource for retirement planning and long-term financial planning in general. Although you will eventually need to utilize a more detailed projection method, the rule of 72 is an excellent starting point.