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Given the return %, how long should you wait for your money to double?

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The answer to the above question can be calculated using normal mathematical route or using  an approximately 500 year old short cut  – Rule 72.

For those who love math and accountancy, the rule 72 may not be new. Luca Pacioli (1445–1514) , in his book ‘summa de arithematica’ discusses the rule when he talks about the estimation of the doubling time of an investment. However, it’s not Pacioli who invented this rule.

RULE 72

Divide 72 by the given Interest Rate  Get the time required to double your money !!

 

Practical, very simple. The Rule of 72 is not absolutely precise, but it gives you a practical estimate that you can work out in your head.

Example 1.

You go into a bank that offers 9.50% annual interest on your FD. How many years will it take for your capital to double?

It’s Simple- Divide 72 by 9.50. Roughly 7 and half years.

Example 2.

At what rate should you invest to double your money in 5 years?

Divide 72 / 5 . The answer is 14.40%. so if you can manage to get 14.40% return on your investment, your money doubles in 5 years.

Example 3.

The rate of interest you pay for your credit cards is 24%. Your credit card liability is Rs 25,000. What happens if you keep paying your minimum due for 3 years?

In 3 years (72/24), you end up paying Rs 25,000 as interest alone. You’ll still have the Rs 25,000 liability remaining.

Example 4

You read from papers that the country’s GDP grows at 7% a year. How long would it take the economy to double it’s growth?

The answer is (72/7) 10 years and 3 months approximately.

Example 5.

The inflation rates are at 9%. What the effect of it on your money?

Your money will lose half its value in 8 years ( 72/9)

Example 6

At 8% interest your money would double in (72/8) 9 years. If you decide to remain invested for 27 years, a small deposit of Rs 50,000 would become Rs 400,000!

Not only in years, can you apply this rule in any time frame.So that’s Rule 72. Nice little short cut that helps you to take financial decisions.The rule is not perfect and it does not account for taxes.

Rule -114 and 144.

We’re sure that Rule 72 would have been amazing to first time readers. There  are  short cuts similar to rule72 to find out the time it would take to quadruple your investment – Enter rule 114 and Rule 144.

Rule 114-Time required to triple your investments.

To find out how long it will take to triple your investment at x% interest rate :

Divide 114 by the given Interest Rate  Get the time required to triple your money !!

So, it will take 114/12 (or 9.5 years) to triple your money at 12% interest rate.

Want to triple your money in 6 years? You will have to generate an annual return of 114/6 (or 19 %!)

Rule 144 – Time required to quadruple your investments.

To find out how long it will take to quadruple your investment at x% interest rate :

Divide 144 by the given Interest Rate  Get the time required to Quadruple your money !!

So, it will take 144/12 (or 12 years) to quadruple your money at 12% interest rate.

Again, If you want your investment to quadruple in 6 years, you will have to generate an annual return of 144/6 (or 24 %!). These rules can be applied at various financial decision points.For example, if calculations show that 20% is necessary to accomplish your goal and the risk-free interest rate is 8%, you have some choices to make. First, if you insist on the risk-free rate then you must extend the time period you are willing to wait for that money. On the other hand, if you cannot extend the time, you’ll have to accept a little more risk.

I would like to repeat what I said previously. The above rules are not 100% accurate as it does not take the impact of taxation and inflation. However, it gives you a reasonable estimate of time required to triple or quadruple your investment at a particular rate of return.

I hope this article was interesting! It will greatly help you with your financial decisions.

 

 

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