Do you love cricket? Who doesn’t, right? Well, imagine a cricket match with no overs or day limitations, and even no target for whoever is batting second. Sounds boring, doesn’t it? Why
No Targets No Planning
No achievements, No fun.
Everything in life should have targets and achievements. This goes the same for personal finance, including investments
You save money and invest this money in decent returns investments. Now what? What is your financial goal? When do you want these investments to double? How much time do you think you need to double them?
Ok, Let’s try this straight question: How much return do you think you should generate to double your investment in, say, 5 years? You need to have at least a basic idea of returns and time aspects, right?*
This is what we’re learning now: Know the formula to find the “X” returns required to double your investments in “Y” time.
The Rule of 72 is a simple and handy formula to estimate how long it will take for your investment to double based on the expected rate of return. Here’s the formula:
Let’s break it down with a couple of examples:
– Suppose you’re investing a lump sum in Bank FDs that offer a 6% return. You can know how much time it takes for your amount to double. Using the formula, your money doubles in 72/6 = 12 years.
– Now, imagine you invest in Mutual Funds that promise a regular return of 9%. Again, applying the formula, your money doubles in 72/9 = 8 years.
Note: This rule is for compounded interest or returns, meaning you reinvest the annual returns in the principal itself.
Works Backwards Too
The Rule of 72 can also be reversed to find the returns required for your money to double.
For instance, if you aim to double your money in six years, you’d need to generate a 12% annual return (72/6 = 12%). This return is compounded to double your amount in 6 years.
Understood?
How to Use the Formula
– Use -1 (For Conservative): If you’re considering investments like NPS or Debts MFs that generate very low-risk returns, say 8%, you can use this formula to estimate the time required for your money to double. In this case, it would take 72/8 = 9 years.
– Use -2 (For Aggressive): If you’re aiming to double your investment in a shorter time frame, like 3 years, you’d need to generate a higher annual return. In this case, it’s a challenging 24% (72/3 = 24%).
Keep in mind that higher returns come with higher risk.
Conclusion
The Rule of 72 is a valuable tool for setting financial goals and understanding the relationship between returns and time. It helps you make informed investment decisions based on your risk tolerance and objectives. Whether you’re taking a conservative or aggressive approach, this formula can guide you in achieving your financial milestones.
*Please share this valuable financial tip with others.*