What if you found out that estimating the future value of money doesn't require advanced math skills? Read on to learn a simple formula that makes this complex task effortless.
A widely used investment planning tool, this rule relies on a simple formula to determine how long an investment takes to double at a given expected return.
Rule of 72 works on the concept of compounding, where interest earned on an initial investment is reinvested to generate even more interest, creating a snowball effect that amplifies returns over time.
If you want to find out the amount taken for any given amount of investment to double in value at a particular rate of interest, put that number (rate) in the denominator with 72 in the numerator.
The result that you get by solving that formular will be the approximate number of years required for the investment to double.
Let's say you have an investment of Rs 1,000 that grows at 6% per annum. Now, how long will it take for it to grow to Rs 2,000?
72/6 = 12 What this means is that it will take a principal of Rs 1,000 about 12 years to grow to Rs 2,000 at 6% per annum.
This handy tool can be applied to a range of investments that work on a definite interest rate. For instance, it can be applied to fixed-rate investment avenues such as savings accounts and FDs.