What is Rule 72?
Rule 72 is a quick, useful formula that helps you calculate the number of years it will take for your investment to double in value at a given rate of interest. The investment matrix depends upon the reciprocal system.
This means if your rate of return is high, you would be able to double your money in lesser years. On the other hand, if your interest rate is low, you have to invest for a long period. If you want to double your money fast, you have to invest it in a high-return saving plan.
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Most investments do not tell you how long it will take to double your invested money. Rule 72 comes as a handy mathematical tool that helps you find out the duration for money doubling.
The Formula for the Rule of 72
Duration To Double the Money = 72 / Expected Rate of Return
According to the rule of 72, if you want to double your money in 5 years, the required interest rate is 15%.
Duration to double the money = 72 / Expected rate of return
Therefore, the expected rate of return= 72/duration to double the money
= 14.5≈15% per annum
Investments That Can Double Money in 5 Years
There are not many investments that can give you an annual return of 15%. So, what are your investment options for doubling your money in 5 years?
1. Equity Mutual funds and Equity Shares: These investments can give you an annual return between 12% to 15%. That said, equity Investments help you to maximize your wealth over a long period. So, you need to invest in these tools for the long term to gain more returns. Also, these investments can be risky because of market fluctuations. So, if you can handle high-risk pressure, this option could be good to double your money in 5 years.
2. Chit Fund: By investing in chit funds, you can expect an average return of 15%, which can go up to a maximum of 41%. With such high returns, you can easily double your money in 5 years. For example, if you invest Rs.3000 per month in a chit fund for a year, you can earn an interest of around Rs.15,500, and that is a whopping 41 % p.a. rate of returns.
3. ULIP: Long-term plans such as ULIPs are safe investment options that can also double your investment. They usually have a lock-in period of 5 years. You also get to enjoy tax benefits under section 80C. Moreover, you can create your personalized mix by investing in other tools like balanced, individual equity or debt funds.
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How Does Inflation Relate to the Rule of 72?
The Rule of 72 not only tells you how long it will take for your investments to double, but it also tells you how long it will take for the money in your bank account or under your mattress to lose half its value.
To measure the impact of inflation, you have to divide the rate of inflation into 72.
For example, if you have Rs. 10,000 in your bank account and the current inflation rate is 6%, it would take 12 years (72 divided by 6) for Rs. 10000 to lose half its value.
The Rule of 72 is a reasonably accurate, simple and useful calculation that can help you project your money’s growth and the impact of inflation on your money.
However, rule 72 should not be the end of your research. Before investing, conduct a thorough review of the investment tools to make an informed decision.