Witness Power of Compounding Using Rule of 72

Witness Power of Compounding Using Rule of 72

Sandeep Singh

Oct 03,2024

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.

What is Rule of 72?

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. 

Power of Compounding

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.

How to apply the rule?

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.

And the answer will be...

The result that you get by solving that formular will be the approximate number of years required for the investment to double. 

Let's take an example

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?

Time to apply the rule...

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. 

Where to use the rule?

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.

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