The rule of 72 applies in calculating doubling money.
New Delhi:
Who doesn’t want to double the money? People make different types of investments to double their money as soon as possible. Common people sometimes do not understand that in how many days the money will double or triple. What is the method by which it can be found out that in how many days the money will double. For this, the ‘Rule of 72’ is used in the financial market. This is a quick, useful formula that is popularly used to estimate the number of years required to double your investment at a given annual rate of return.
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This formula can calculate the annual rate of compound interest from a given investment and tells how many years it will take to double the investment. That is, this formula calculates the compound interest (compound return) and tells that in how many years the money will be doubled. There should be information about the interest rate available for this. The Rule of 72 is often taught to beginner investors because it is easy to understand and calculate through.
Through this rule, you can also find out that if a bank or any financial institution is giving interest rate at a certain rate, then in how many days the money will double. To calculate the time period in which an investment will double itself, divide the integer 72 by the expected rate of return.
Years to double = 72 / Expected rate of return
Along with this, this formula is also able to tell you that if you want to double the money in a certain time, then at what rate of interest you will have to opt for investment. That is, to calculate the expected rate of interest, divide the integer 72 by the number of years required to double your investment.
Expected rate of return = 72 / doubling of years
The Rule of 72 has some other uses as well. As such, the rule of 72 can apply to anything that grows at a compound rate, such as population, macroeconomic numbers, fees or debt, etc. If gross domestic product (GDP) grows at 4% annually, the economy would be expected to double in 72/4 percent = 18 years.
This rule can also be used to find the time it takes for the value of money to halve due to inflation.
If inflation is 6 percent, the given purchasing power of money will be halved in about 12 years. According to the formula (72/6 = 12).
If inflation decreases from 6 percent to 4 percent, an investment is expected to lose half its value in 18 years instead of 12 years.
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