Rule of 72

Those who watched the final week’s episodes of Kaun Banega Crorepati will recollect there was a participant named Mahaveer Prasad (age 25 years) from a village in Rajasthan.  He won Rs. 6,40,000.  The unique thing about the participant was his approach to the money he will be winning from this contest.  Generally, the participants want to pursue their goals from the award money or to go for a world tour or to just save for future.  However, Mahaveer Prasad was much clear in his approach and stated that he will not expense out any money he wins.  He will save and try to double, triple or quadruple it.  When asked about how this can be achieved, he says that he will save it in bank deposits and after 8 years, the money will automatically be double!

Without going into whether this way is the most efficient way of doubling the money, we should appreciate his intention and clarity in investments.  At a young age of 25 years, he knows that he wants to save the money and want to grow it.  This he knows can be done through investment in instruments like fixed deposits and the money doubles after certain number of years.

 

The time period to double the money will vary depending on the type of instrument chosen for investment.  Further one need to consider the incidence of tax on the interest or profit generated.

The important point to note here is how simple is it to double one’s money within certain number of years.  Yet most of us just try to ignore investing since we do not know how our investment will look like after few years.  This uncertainty procrastinate the investment decision making.  It helps to visualize that by investing in a particular company’s bond, my money will double in 9 years.  This way we know the time frame as well as the final value of the investment.

The Rule of 72 helps us in visualizing how our investment will be after a certain time period.  This is a simple rule which tells how long will it take to double your money if you have it invested at a certain interest rate.  You just need to divide 72 by the rate of interest offered on the instrument.  The answer is the number of years it takes to double your money.  For eg:  If you earn an interest of 8% on a fixed deposit, your money will be double if you stay invested for 72 divided by 8 i.e. 9 years.

This assumes you keep on reinvesting the annual interest earned at the same rate and ignores the tax aspect on income.

This rule can be handful in comparing various investment products.  In case your goal is to double or quadruple your money to buy a car or your dream home, you can calculate the number of years it will take by this formula.

The table below shows the number of years it takes to double the money at various rates.

Rate of Return	No. of Years
5%	14.40
6%	12.00
7%	10.29
8%	9.00
9%	8.00
10%	7.20
11%	6.55
12%	6.00

Where you aware about the rule of 72?  Whether visualizing your money after the investment horizon helps you in making investment decision? Do share your comments and suggestions below.