Rule of 72
Rule of 72 is a financial method that helps an individual in calculating the period in which the investment gets doubled for a particular rate of interest. This is helpful in case of compound interest and low interest rates. Rule of 72 Calculator makes a quick calculation of time period stated above. It is more useful in cases which follows a pattern of compound interest. It is also of great use in case of real estate businesses.
There are other similar rules named as a rule of 70, rule of 69, etc. in finance for such similar calculations. And all of these rules, including Rule of 72 provide the approximate results of periods that double the investments. However, Rule of 72 is the simplest in and is widely popular and practiced globally in the financing world.
Formula for calculating Periods by Rule of 72
In order to obtain a period within which the money will get double with the help of the rule of 72, the number 72 needs to be divided from the rate of interest. A mathematical representation of the formula is as follows:
Rule of 72 = 72 / i
Where, i = Interest Rate
About the Calculator / Features
Rule of 72 calculator effortlessly calculates the approximate time period in which the investment amount gets doubled up. The user has to provide the rate of interest only.
How to Calculate using Calculator
The user has to insert the following data into the calculator for getting an instant result of the calculation
It is the expected rate of return for an investment
Example of Rule of 72
Let us try to understand this concept of rule of 72 with the help of an example.
A manufacturer is planning to invest in capital intensive technology for his production activities. This will require huge investment in machinery. And according to his estimates, he has to invest $1,000,000 which will earn a return at the rate of 15%.
He wants to know that how much time it will take to get his investments doubled.
Interest Rate = 15%
Rule of 72 = 72 / 15 = 4.8 years
Rule of 72 helps in accelerating the decision-making. The investor gets an idea of the time period in which his investment will get doubled for a given rate of interest. In the example above, it is 4.8 years to get the money double.
It can make a big gap of time for a very minor difference in interest rate. Let’s say that the investment will require 36 years if the interest rate is 2% (72 / 2) and 24 (72 / 3) years if the rate is 3%. This shows a long time of 12 (36 – 24) years on difference of 1% (3% – 2%) only.
The rule does not provide the exact result of the time period and hence, one may call it not perfect. However, the idea of these universal rules is to have a quick reference to prioritize or make decisions between alternatives. In other words, it can be used for the elimination process for various options without exercising a lot of time and effort. And the selected ones could be further calculated to know the exact time period.
Another point to note is that this Rule is applicable in the case of compound interest only. This will not give the desired result if we try to make it applicable in case of simple interest.