You might have heard how long it will take for your money to double in a fixed deposit, mutual funds, or any such investment scheme, but there is a simple, power-packed formula that can answer your inherent query within the Rule of 72.
This time-honored financial rule lets you evaluate the number of years needed for your investment to grow twofold based on a fixed annual interest rate. This needs no complex calculations or any financial expertise; just a quick division will provide you your answer.
What Is the Rule of 72?
The Rule of 72 is an extremely straightforward mathematical formula that estimates the amount of time it takes until your money doubles, given your annual interest rate. Here’s the trick:
Divide 72 by the annual interest rate. The result will approximately give you the number of years it would take for your investment to double.
How does the Rule of 72 work?
Now let’s have a more practical example and see how this rule applies in a different investment scenario.
Example 1: Fixed Deposit of 6% Interest
Let’s say you invest ₹10,000 in a fixed deposit that pays 6% annual interest. Take the Rule of 72:
72 ÷ 6 = 12 years
Meaning in approximately 12 years that ₹10,000 will become ₹20,000.
Example 2: More Returns from 8% Interest
With the same amount invested in a scheme of 8% interest:
72 ÷ 8 = 9 years
Your money will double in just 9 years.
Example 3: Aggressive Investment at 24% Interest
Then, for a high-return investment, i.e., for a mutual fund or equities having an average return of 24% in a year:
72 ÷ 24 = 3 years
Your invested amount could potentially double in only 3 years even faster growth rate!
Real-Life Implementations of the 72 Rule
It is not just limited to fixed deposits but applies to almost any investment with a fixed return, including:
- Bank FDs
- Post Office Schemes
- Mutual Funds(for consistent returns)
- Corporate Bonds
Post Office Time Deposit Case Study (7.5% Interest)
If you invest 50,000 in a Post Office Time Deposit under 7.5% interest:
72 ÷ 7.5 = 9.6 years
In such an investment, it will double to ₹ 2 lakhs in around 9 years and 7 months but when investing, make sure you do remember maturity periods and tax implications.
What Makes the Rule of 72 So Practical?
Quick Estimation- No need for stressing your minds with complex financial calculators; just a simple division will give you a clear estimate.
Investment Planning- It helps you compare different schemes and choose the best for rapid wealth accumulation.
Financial Discipline: It reinforces smarter investment choices by demonstrating the prowess of compounding.
Limitations of the 72 rule
Though very useful, it doesn’t provide an exact figure, but only an approximation by the rule of 72. Changes in inflation, interest, and market volatility may slightly change the actual doubling time.