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A Smart Trick Called the "Rule of 72"
In this post we are going to discuss about a smart trick which we call the Rule of 72. By using this Rule of 72 technique, we can do calculations, like suppose something is growing in a compounded manner and I want to know in how much time it will double, then using the Rule of 72 we can do the calculation in minutes.
If I give an example of its main application, like if you invest in FD where your money grows in a compounded manner at the rate of 8% per annum, then in how much time your money will double or or if you want to find out that if inflation grows at the rate of 6%, then in how much time the prices of whatever you have or the goods you buy will double, you can do this quick calculation using the Rule of 72 and if you want to double your money in 6 years, then by how much percentage you have to increase your money, that too you can calculate using the Rule of 72.
Why This Rule Matters (A Quick Comparison)
Suppose the returns you get from mutual funds, which is generally compounded returns, you get 15% compounded returns annually and if you keep FD, you get 8% compounded returns annually and in savings, let's say you get 4% compounded returns we have taken such an approximation, the returns can be anything, so now we want to find out or compare how much time it takes for the money to double in all three cases.
So if I tell simply, the money in mutual funds will double in 4.8 years, the money in FD will double in 9 years and the money in savings will double in 18 years. So by comparing here you will get a better idea when you calculate the time taken for the money to double so now if you keep the money in FD then it will take 4 years more for the money to double as compared to mutual funds and if you keep the money in savings then it will take 13 years more for the money to double as compared to mutual funds and it will take 9 years more for the money to double as compared to FD. So in this way you can know where you should keep the money so that the money doubles as soon as possible
The Rule of 72 Formula (It's Simple)
The Rule of 72 says that if you calculate the time in which money will double, you divide 72 by the return.
n=72/r
where
n = time
r = rate of return
4 Practical Examples (Inflation, Salary, and More)
Example 1. When will prices double at 6% inflation?
Solution. n=72/r
n = 72/6
n = 12 years
So prices will double after 12 years
Example 2. When will my salary double at 10% annual growth?
Solution. n=72/r
n = 72/10
n = 7.2 years
Your salary will double after 7.2 years
Example 3. How much return is required to double the money in 6 years
Solution. n=72/r
6 = 72/r
r = 72/6
r = 12%
So to double the money in 6 years 12% annual return is needed
Example 4. At what rate my insta followers will double in 1 year
n=72/r
And 1 year = 12 months
12 = 72/r
r = 72/12
r = 6%
So you need a growth of 6% per month to double your insta followers.
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About the Author: Abhishek Lohar
B.Com Graduate and the Founder of Free Online Financial Calculator. I specialize in simplifying complex financial calculations and investment strategies. My mission is to ensure you can make confident financial decisions using our research-backed content and accurate calculators.
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Disclaimer: The information provided in this article is for educational purposes only and should not be considered financial advice. Please consult with a qualified professional before making any investment decisions.