• HDFC securities
• 22 Feb 2023
• Knowledge Centre

 

Having a thorough understanding of how your investment works is necessary. You need to be aware of the returns you will reap and their expected timeline. It facilitates better financial planning. When you invest, it's natural you wish the financial instrument to double your investment amount. Several financial instruments reap such returns. If you are wondering how long you will have to wait to see your investment value double, you must use the rule of 72.

What is the rule of 72? 

Rule of 72 is a mathematical formula that helps you understand the impact of compound interest on your investment. The formula helps you determine the number of years in which your invested amount will double at a fixed annual return rate.

You can employ the formula the other way around as well. You can compute the number of years your investment amount is likely to get doubled and determine the annual return rate at which the investment will grow.

The rule of 72 formula can be applied to any concept that grows at a compound rate like population, investments, charges, and loans. The formula can also be used to determine the number of years your money’s value will be halved in a scenario of inflation.

Note that the rule of 72 works best for compound interest rates that are within the range of 6 to 10%. The interest should be compounded annually only. If your interest rate applies to your investment amount every quarter, consider computing it annually.

For instance, a 5% interest rate applies to your investment every quarter. Compute the total interest rate for the year, which will be 20%, to calculate the number of years your investment amount will double in.

How to employ the rule of 72?  

Employing the rule of 72 is very simple. All you need to do is divide the integer 72 by the annual interest rate to determine the number of years. Following is a more detailed description of how the formula can be employed in various ways.

Calculating the number of years 

For instance, let’s assume you have invested Rs 5,000 in a financial instrument at an annual return rate of 8%. Using the formula you derive the equation – 72/8= 9. As the calculations suggest, your investment amount will double in a time period of 9 years.

Calculating the interest rate 

For example, you wish to invest Rs 5,000 for a time period of 6 years and wish to determine the interest rate at which your investment is likely to get doubled. By employing the formula, you derive the equation – 72/6 = 12. As the calculations indicate your investment amount will double i.e., become Rs 10,000 at a return rate of 12%.

 

Calculating the halved value 

Suppose you do not invest a sum of Rs 15,000. If the expected inflation rate is 3%, using the formula you will realise that the sum will become halved within 24 years. Use the rule of 72 calculator to determine the value your money will have in the years to come and make suitable investments before it’s too late.