The Rule of 72 And Variations : How Many Years Can I Double My Investment?
What Is Rule Of 72? If you want to do a rough calculation about when your investment can be doubled from a fixed annual interest rate, you may need a calculator. However, if you know the rule of 72, you can quickly estimate the number of years required to double your funds at a given annual rate of return. Here’s the formula: Years To Double The Funds = 72 / Annual Interest Rate. From this formula, you can see that this Rule of 72 will come in handy for some simple mental calculations to get an approximate value without the help of any tools. It can be used as a quick tool for estimation of financial return and understanding the nature of compound interest. Usage Of The Rule Of 72 For example, if you get a 6% annual interest from a bond, your investment will take 72/6 = 12 years to double. Conversely, if you want your funds to be doubled in 10 years, you need an annual return of 72/10 = 7.2% to fulfill your goal. This rule can also be used in some calculations in macroeconomics. Let's assume a country's GDP growth rate is 4% per year, it needs 72/4 = 18 years to double its economy. Moreover, the usage of this rule can be extended to other areas such as the calculations of inflation or the expenses, which means that it can be used to find the number of years it takes for money's value to halve due to inflation. For instance, If the inflation rate is 2%, your money will lose half its value in 72/2 = 36 years. If that rate is increased from 2% to 3%, then the corresponding year that your fund will halve is 72/3 = 24 years. If your credit card has a 18% annual interest rate, after 72/18 = 4 years, your owned amount will be doubled. One thing we need to pay attention to is that it is a simplified formula which is reasonably accurate for low rates of return. From this chart, we can see the accuracy of this rule is less precise when the rates of return increase to a high level. The Rules of 114 and 144 The Rules of 114 and 144 are some small variations of the rule of 72. The Rule of 114 can be used to calculate how many years it will take your original funds to triple, and the Rule of 144 will tell you how many years it will take your investment to quadruple. Let's revisit the previous example, at a 6% annual return, the investment will triple after about 114/6 = 19 years and quadruple after about 144/6 = 24 years.
