What is the Rule of 72 and How to use it to Double your Wealth?

For a lot of investors both residents and Non-Resident Indians (NRIs), the goal for investing has been to grow their wealth and build a corpus based on their investment goals. Investors often look to generate multi-fold returns over a long period on their investments. In the world of finance, there’s a nifty little formula known as the Rule of 72 that can be a game-changer for investors. This rule provides a quick and easy way to estimate how long it will take for an investment to double in value. In this blog, we’ll dive into what is the Rule of 72, how to use the rule of 72, and how much time it will take for you to double your wealth. 

What is the Rule of 72? 

The Rule of 72 is a simplified formula used in finance to estimate the approximate time it takes for an investment to double in value, given a fixed annual rate of return. The rule provides a quick and easy way for investors to gauge the potential growth of their investments without the need for complex calculations. To use the Rule of 72, you divide 72 by the annual rate of return to obtain the number of years it would take for the investment to double.

This rule is particularly useful for making rough estimates and strategic financial planning, allowing investors to quickly assess the impact of different rates of return on the growth of their wealth. While it is not a precise formula, the Rule of 72 offers a valuable heuristic that can aid in decision-making and goal-setting within investments.

Also read: 10 Mutual Funds That Doubled Wealth In 5 Years

Understanding the Rule of 72 and How to Use it? 

The Rule of 72 is a simple formula used to estimate the number of years it takes for an investment to double, given a fixed annual rate of return. The formula is straightforward:

Years to Double = 72/Annual Rate of Return 

Let’s break this down with an example:

Example: Suppose you have an investment with an annual return of 12%. Using the Rule of 72, you can estimate the number of years it will take for your investment to double:

Years to Double = 72/12

I.e Years to Double = 6 years

So, in this example, it would take approximately 6 years for your investment to double at a 12% annual rate of return.

Also read: Top 5 Tips for NRIs to Pick a Winning Mutual Fund

How to Use the Rule of 72 to Double Your Wealth? 

Utilizing the Rule of 72 is a strategic approach to potentially double your money by estimating the time required for an investment to achieve this milestone. To employ the rule, simply divide 72 by the annual rate of return your investment is expected to generate. The resulting quotient represents the approximate years it would take for your initial investment to double in value. For instance, if you have an investment with a 12% annual rate of return, dividing 72 by 12 gives you 6. This 6 years is the timeline required to double your wealth. 

Similarly, if the investment gives an annual return of 9%, then basis the rule of 72, it will require 8 years to double your investment. By incorporating this rule into your financial planning, you gain a quick and insightful tool for evaluating different investment options, setting realistic goals, and making informed decisions to expedite the growth of your wealth.

Also read: Best SIP to Invest in 2023 – Top 10 SIP Mutual Fund Plans for NRIs

How to Double your Wealth in 1 Year with the Rule of 72? 

According to the rule of 72, if you want to see your wealth double in just one year, then you need to have a return of 72% for the year since using the formula, 72/72 = 1 is the answer. This will require to be an aggressive investor. 

How to Double your Wealth in 5 Years with the Rule of 72? 

According to the rule of 72, if you want to see your wealth double in just five years, then you need to have a return of 14.5% for the year since using the formula, 72/14.5 = 1 (approx) is the answer. This will require to be an aggressive investor. 

Some Other examples of The Rule of 72

Below are some of the other examples of the application of the rule of 72 and how many years it will require to double your wealth: 

Can the Rule of 72 be applied to any type of investment?

Yes, the Rule of 72 is a versatile tool that can be applied to various types of investments, including stocks, bonds, mutual funds, and other assets. It helps investors understand the time it takes for their money to double, regardless of the investment vehicle.

Also read: Best Mutual Funds for NRI in India 2023

Who Came Up With the Rule of 72?

The origin of the Rule of 72 can be traced back to 1494 when Luca Pacioli mentioned it in his extensive mathematics tome, Summa de Arithmetica. However, Pacioli did not provide a derivation or explanation for the rule’s efficacy, leading to speculation that the rule might have existed prior to Pacioli’s publication.

Wrapping Up

The Rule of 72 is a valuable tool for investors seeking to understand the time it takes for their investments to double. By applying this rule, you can make more informed decisions about your financial future, set realistic goals, and adjust your investment strategy accordingly. Remember that while the Rule of 72 provides a quick estimate, it is not a guarantee, and actual investment outcomes may vary. 

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FAQs

What is the Rule of 72, and how does it work?

• The Rule of 72 is a formula used to estimate the number of years it takes for an investment to double in value at a fixed annual rate of return. You can calculate it by dividing 72 by the annual rate of return.

Is the Rule of 72 an accurate method for predicting investment growth?

• While the Rule of 72 provides a quick and easy estimate, it is not always precise. It assumes a fixed rate of return, which may not be the case in real-world scenarios. Actual investment outcomes may vary.

How do I determine the annual rate of return for my investments?

• The annual rate of return can be based on historical performance, projected returns, or the average return of similar investments. It’s essential to consider factors such as market conditions, economic trends, and the specific characteristics of the investment.

Can the Rule of 72 be used for short-term investments?

• The Rule of 72 is generally more applicable to long-term investments due to its compounding nature. The rule can still provide an estimate for short-term investments with a fixed rate of return, but it may not be as accurate.

How can the Rule of 72 help in retirement planning?

• Understanding the Rule of 72 can aid in setting realistic retirement savings goals. It allows you to estimate how long it will take for your investments to double, helping you plan for the desired level of financial security in retirement.

Does the Rule of 72 consider inflation or taxes?

• No, the Rule of 72 is a simplified formula and does not take into account factors such as inflation or taxes. It provides a basic estimate and should be used in conjunction with a comprehensive financial plan that considers these additional elements.

Can the Rule of 72 be used for variable rates of return?

• The Rule of 72 assumes a fixed rate of return. For investments with variable rates, it is advisable to use an average rate over the investment period for a more accurate estimate.