Doubling your investment is a milestone a lot of investors dream about. It is considered a high success and investors have been using math for a long time to find a way to calculate it. The rule of 72 is one such calculation method used to see when you can double your investment given a fixed annual rate of growth.
The rule is so widely used that a lot of accounting software have adapted it over the years. Let’s learn more about the rule of 72 and see how long it will take for you to double your investment.
The rule of 72 formula
The formula of rule of 72 is simple. It is –
Years to double your investment = Interest rate/ 72, where interest rate could be the fixed or projected growth of your investment.
In fact, the rule of 72 could be applied to anything that has a compounded growth and even numbers like population can be calculated on the basis of this.
Let’s see how the rule of 72 can work with different investment vehicles
Mutual fund investments
The one caviar with using the rule of 72 to calculate the growth of your money through a mutual fund is that these funds do not have a fixed growth rate. Just like with stock markets, a mutual fund’s growth rate relies on market conditions. But you can use the 72 rule to make an assumption according to market conditions.
For this, you will need to find out the projected growth rate of the fund. This can be done using your own research or with help of a financial expert. You or your financial expert should take in multiple factors like inflation, growth potential of the fund, its past performances, etc. to come to a conclusion.
Let’s take an example to understand this a little better. Suppose you came to a conclusion that your mutual fund could give you an average growth of 12%, you could use the rule of 72 formula to see how many years it will take your fund to double your money.
Years to double your investment = Interest rate/ 72
Here, the interest rate is the expected growth rate, which is 12%
So, years to double your investment = 12/ 72
That is 6 years.
The rule of 72 comes to this conclusion after taking in the compounding growth rate as well.
The same method of assuming the growth rate can be used to calculate returns from the National Pension System and Exchange Traded Funds as well.
Fixed deposits and recurring deposits
The rule of 72 works better here as there is a fixed interest rate when it comes to bank deposits. Here, you will know exactly how much you will earn, and you can put that percentage in the equation to know how long it will take for your money to be doubled.
For instance, let’s suppose your FD gives you a 6% annual interest rate.
Interest rate/ 72 = 6/72 = 12
Hence, this FD will take 6 years to double your investment
Even when there are complex calculations and equations out there, the rule of 72 is a simple and accurate way that will help you calculate your money’s growth. But make sure you depend on other factors like investment advisory and proper research as well before you make an investment.