Rule of 72

31st October is celebrated as World Savings Day but what a coincidence Halloween is also celebrated on the same day. (tragedy is we know about Halloween but….) Let’s learn some basic rules that you can practically apply in your day-to-day life.

The ‘Rule of 72′ is a simple way to determine how long an investment will take to double, given a fixed annual rate of interest. By dividing 72 by the annual rate of return, investors can get a rough estimate of how many years it will take for the initial investment to double itself.

For example, the rule of 72 states that Rs 1 invested at 10% would take 7.2 years (72/10 = 7.2) to turn into Rs 2. In reality, a 10% investment will take 7.3 years to double (1.10^7.3 = 2). When dealing with low rates of return, the Rule of 72 is fairly accurate. Albert Einstein said compounding is eighth wonder of this world & “rule of 72″ eight wonder. Below chart compares the number of years it takes an investment to double at certain rate.

Every Penny Counts

Let’s try to practically apply this rule. Let’s assume that as today is World Savings Day – you added Rs 1000 to your retirement kitty. (assuming you are 29)

WOW! So if someone save Rs 1000 today for his retirement – it will become Rs 32000 in 30 years or Rs 64000 in 36 years.(@ 12%) Just imagine if this amount is Rs 10000 this month (if you don’t splurge in the festive season) or Rs 1 Lakh this year (bought a small car or vacation or may be combination of many small things).

There is also a reverse usage of rule of 72 – where you divide 72 by number of years & you will get the rate at which money will double in this period. Similarly there are 114 (triple) or 144 (quadruple).

Hemant Beniwal