Real Power of Compounding Through Rule of 72: How soon can Rs 5,000/month investment grow beyond Rs 5 lakh at 12% expected return? Learn calculations here
Know how the Rule of 72 helps estimate investment growth and how long will it take a Rs 5,000 monthly investment to grow over Rs 5 lakh with a 12% return? Perfect for optimising your financial planning!
ZeeBiz WebTeam | Oct 02, 2024, 01:53 PM IST
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What is the Rule of 72?
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A formula used to estimate how long it takes for an investment to double based on its fixed annual rate of return.
- You calculate this by dividing 72 by the rate of return.
A formula used to estimate how long it takes for an investment to double based on its fixed annual rate of return.
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Key Uses of the Rule of 72
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Estimate Investment Growth: Helps predict when your investment will double in size.
- Simple Calculation: Quick and easy way to assess if you're on track with financial goals.
- Approximations: Not the most precise, but it gives a close estimate for growth.
Estimate Investment Growth: Helps predict when your investment will double in size.
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Understanding the Rule of 72
What it Does
- Determines the time it will take to double your money using a given annual rate of return.
- Also applicable for calculating how inflation halves the value of your money.
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Formula
T ≈ 72 ÷ R
- T = Time to double the investment
- R = Interest rate per period (%)
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Limitations
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Works best with an interest rate close to 8%.
- Less accurate for rates much higher or lower than 8%.
Works best with an interest rate close to 8%.
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Formula Breakdown
Basic Calculation
- Divide 72 by the annual rate of return.
- Time to double can be expressed in days, months, or years depending on how the interest rate is stated.
Approximation
- The formula uses an approximation (≈) symbol because it provides an estimate, not an exact figure.
Other Applications
- Can be applied to estimate how long it takes for an investment to lose value (halving time).
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Benefits of the Rule of 72
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Easy to Use: Simple and quick calculation for investors.
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Flexibility: Applies to various market factors, such as GDP or population growth.
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Investment Strategy: Helps investors gauge when to sell for a 2:1 profit.
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Risk Management: Allows adjustments to investment positions based on growth estimates.
Easy to Use: Simple and quick calculation for investors.
Flexibility: Applies to various market factors, such as GDP or population growth.
Investment Strategy: Helps investors gauge when to sell for a 2:1 profit.
Risk Management: Allows adjustments to investment positions based on growth estimates.
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How long will it take a Rs 5,000 monthly investment to grow over Rs 5 lakh?
- Rule of 72: At a 12% annual return, a lump sum investment doubles in approximately 6 years.
- SIP Doubling: For a Rs 5,000 monthly SIP at 12% annual return, the investment will approximately turn into Rs 5.16 lakh about 6 years due to compounding effects.