If you are doing investment from a long term or reading investment related news from a long time then you must had heard term Rule 72 or Rule 70 Or Rule 69. Actually these are rules which are used to calculate the time taken by any investment to become double.
Suppose you wanna invest in a plan but you wanna know in how many years your initial investment become double then you can use Rule 72. To use Rule 72 you need to divide the rule number i.e. 72 by the interest you are getting for investment and then you will get an approximate period required for doubling your investment.
These rules were used earlier when there is no scientific calculators or spreadsheet support was there and only a basic calculator can be used. This rule is also known as mental shortcut test as it required mental power to calculate the period needed for doubling your investment.
This rule requires exponential growth so it uses compound interest method rather than using Simple Interest method. While calculating period you can use 69 too as it provides more accurate term but 72 is uses mostly because its divisible very easily.
Now if you wanna know how it works then let us take an example for it. Suppose you are going to invest Rs. 100 in an investment which gives you interest of 10% per annum. Now we are required to calculate in how many years does our investment become double.
Time (T) = 72 / Rate of return (R)
Here T is Time Period and r is rate of Return. So 72/10 = 7.2 years. So it means if you invest Rs.100 then it will become Rs. 200 in 7.2 years (approx).
While using this method you must note that this formula is derived for calculating short period investments, so as short is the period of invest as accurate your answer will be.
Well this method is not only used in calculating investment doubling time period but rather you can use this formula on anything which tends to grow. Suppose :-
You wanna know :-
- If your economy is growing at the rate of 8% then in how many years it will become double, then use 72/8=9, so in 9 years your economy will become double of what is it today.
- Suppose your population is increase at the rate of 4% then it will take 18 years (72/4) to become double.
So you can use this formula on anything which is growing in nature. Just divide 72 with rate at which its increasing and you will get your result.