What is the Rule of 72 in finance?

Your search for a proven investment strategy ends right here. Learn how to use the Rule of 72 in your investments

Investing is essential, but finding the right investment strategy can be a challenge. The Internet is flooded with all kinds of methods to make returns on your investments. You should not follow all of them, though, as some strategies do not work for every investor. What you need, instead, is a proven way to make returns.

The Rule of 72 does exactly that. Here is what you require to understand how it helps and why you should keep it in your investment toolbox.

What is the Rule of 72 in finance?

The Rule of 72 is a numerical concept that predicts how long an investment will require to double in worth. It is a simple formula that everyone can use. Multiply 72 by the annual interest generated on your savings to determine the amount of time it will require for your investments to increase by 100%.

This criterion, however, may only be applied to compounding growth. It can only be used for assets that pay compound interest and not simple interest. You only earn interest on the principal sum you invest with simple interest. Compound interest is "interest gained on interest," meaning it accrues on both the principal and the accrued interest. It encourages you to invest for the long term, enabling you to get the highest rate of interest.

How to calculate using the Rule of 72?

To determine the Rule of 72, divide 72 by the bank savings interest rate. You can use the Rule of 72 formula given below to compute the time in days, months, or years to double your investments. Enter the annualised interest rate, and you will get the length of time it will take to double your investments.

N = 72 / r

Where:

N is the number of intervals, which is usually years; 72 is a constant; r is the rate of interest.

For instance, you can employ the Rule of 72 to calculate how long it will require for a currency's purchasing power to be half owing to inflation, or how long it will take for the combined worth of a universal life insurance policy to fall by half. Just substitute the inflation rate for the rate of return, and you will obtain an estimate of how long it will take for the starting sum to drop half its value.

The inner workings of the Rule of 72 in finance

Compounding helps your investment increase because interest is effectively added to your principal and used as the basis for further interest computations. Meaning the pace of growth accelerates as interest accumulates and your money increases. If you reinvest the profits from your holdings, for instance, your profits are compounded. As a result, the Rule of 72 comes into play. Keep in mind, though, if you opt to take out your dividends instead of reinvesting them, your earnings may not compound, and the Rule of 72 may not apply.

It is preferable if interest rates, or rates of return, are between 6% and 10%. It is the return range for most investment accounts, such as retirement accounts, index funds, brokerage accounts, and mutual funds.

The Rule of 72 in finance can be a useful index to get started on your investment journey. If you are looking for a bank for a savings account, you can consider IDFC FIRST Bank. At IDFC FIRST Bank, you can get an online saving account that offers competitive interest rates, monthly interest credit on savings, and many other alluring features. Log into IDFC FIRST Bank’s banking app and open a saving account online to get started!

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The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.