Rule of 72 - How many years to double your money?

Have you ever been in a situation where you are required to immediately decide upon an investment decision, without access to a computer or a financial calculator. Rule of 72 is a time tested rule of thumb to find out the answer to the question - How much time will it take to double my investment at a given rate of return? The actual mathematical computation of this is very cumbersome and beyond reach of common man without Microsoft Excel. It is a very handy and lightening fast benchmark to determine how good or not so good a potential investment is likely to be.

The rule of 72 works like this.

To compute the Number of Years required to double the amount you have to invest just divide 72 by the rate of return and lo and behold you have the Number of years required.



As an example, when I started my job, the rate of return offered by my bank was 12% and hence by rule of 72 I could compute that it will take 6 years for my fixed deposit to double. (which is a close approximation of 6.12 years which it actually took). Rule of 72 is an approximation which works well as long as the rate of return is below 28%, beyond which the error increases.

The Rule of 72 can be applied to compute the rate of return required to double my money in a pre-determined time frame. Suppose I want to double my investment in 3 years, I need to find out an opportunity which gives me (72/3=) 24% rate of return.

To further understand the Rule of 72, consider the case of Deepak who borrowed from a money launderer Rs. 1,00,000 to meet certain emergency at a whopping 36% rate of interest. He was unable to re-pay even a single penny to the "seth" for two years. When he visited the seth two years later, he found that he now owes Rs. 2,00,000 (=72/36) to the seth. No wonder you read a lot of incidences of farmers committing suicides because of spiraling loans and harassment from money launderers because of non-return of loans.

Rule of 72 (which is a simplification of compounding) works in your favour when you invest money and works against you when you when you borrow it.

Happy Investing !!