How Can You Double Your Money with Rule of 72?
Every time we discuss doubling money over some time, calculations are made using a crucial formula known as the "Rule of 72".
A simple method for estimating how long it will take for an investment to double based on its fixed yearly rate of return is the Rule of 72.
You may calculate roughly how long it will take for your portfolio to double in size by dividing 72 by the fixed rate of return.
The Rule of 72 has numerous applications, but one of them is anticipating your investments and financial objectives. Although it isn't the most precise method of predicting returns, it gives you a simple, quick approach to see whether you're keeping up.
In this blog, we will demonstrate the Rule of 72 rule in action and show how it can be used to estimate how much your money will increase in value over time. Continue reading!
Understanding What is the Rule of 72
People often search on the internet about how to double your money. Several options pop up, including the Rule of 72.
The Rule of 72 is used in finance to determine how long it will take for an investment to double in value and provide a given annual rate of return. The Rule is a quick computation that may be used to estimate how long it will take for an investment to double in value.
The straightforward formula is 72 divided by the yearly interest rate.
The same technique may be used to determine how long it will take for inflation to reduce a starting value by half instead of double it.
The Rule of 72 is an approximation that is not entirely correct because it is derived from a more intricate computation.
The Rule of 72 produces the most accurate findings when the interest rate is 8%; the further away from 8% you go in either direction, the less accurate the results. Yet, using this helpful formula might give you a better idea of how much your money might increase over time, given a particular rate of return.
Formula for the Rule of 72
From rapid financial calculations to population predictions, the Rule of 72 is a fantastic mental arithmetic shortcut for estimating the influence of any growth rate.
The formula for the Rule of 72 can be stated as follows-
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T ≈ 72÷R |
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T = the number of periods necessary to double the value of an investment R = interest rate per period expressed as a percentage |
You need to divide 72 by the rate of return to determine the Rule of 72. Depending on how the interest rate is presented, you may get the doubling time in days, months, or years using the method above.
You may find out how many years it will take for your assets to double, for instance, by entering the annualized interest rate.
As opposed to the standard equals (=) symbol, the formula employs the roughly equals (≈) symbol. That is because this method, which is most accurate for assets earning an average rate of 6% to 10%, provides an estimate rather than an actual number.
The Rule of 72 may be used to calculate the halving time for an investment that decreases in value and doubles time, which is how it is often applied.
Benefits of the Rule of 72
- Every investor may utilize it right away because it is a straightforward strategy.
- Investors can change their positions and risk exposure as necessary.
- Any market variable, including GDP, population growth, and so on, can be used as long as there is an expected yearly interest rate.
- It enables investors to estimate how long it will take for their money to double.
- It provides investors with a precise time frame for when they can sell their investment securities for a profit of two to one.
Drawbacks of the Rule of 72
- Investments with simple interest and those with variable interest rates do not comply with the Rule of 72.
- It is not a precise figure and can only provide an approximation of the time required to double an investment.
- For lower rates of returns, the Rule of 72 is often accurate. However, any more significant than that, the projected value may change.
- The Rule of 72 is rendered invalid and useless if the interest rate increases for any reason.
▶️ You may also want to know What is the 15*15*15 Rule in Mutual Funds?
Conclusion
In conclusion, when deciding how much to invest, it is crucial to remember the Rule of 72.
If you start investing early, even a modest amount may have a significant influence. When you spend more, the impact will only grow as the magic of compounding takes its toll.
The Rule of 72 also determines how rapidly buying power can be lost during inflationary periods.
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