Hey, stop!
Looking at your long term investments daily isn’t going to work. It’s for long term and will take a significant time to double.
Do you know how much?
Wait. If you are going to calculate it using a complex mathematical formula, by the end of the article, you will realise calculating this duration was never so easy. Let me introduce you to the ‘Rule of 72’.
The Rule of 72
It is a quick and easy formula used to estimate the number of years required to double the invested money at a given annual rate of return. The calculation is pretty simple, you just need to divide 72 by the annual interest rate.
Years to Double= 72 ÷ Rate of return on an investment
For example, if the rate of return is 6%, it will take approximately 72 ÷6, that is 12 years for your investment to double. (Please note that the return should not be the absolute value, that is instead of taking 6% as 0.06, we use 6 in this equation)
Now let’s understand how much the value differs from the actual number of years. To arrive at the exact doubling time, we need to use the formula given below:
Where, T = time to double in years; ln = natural log function; and, r – compound interest rate per period.
On solving this formula for a 6%
rate of return per year, we get,
T = 0.6931 ÷ 0.0582 = 11.9 years
The table below shows a
comparison between the doubling time calculated using the ‘rule of 72’ and the logarithmic
equation for various rate of returns:
As you may observe, the ‘rule of 72’ is good enough to determine the approximate number of years. It is also important to note that the rate of interest here is the compounded rate and this rule may not work well for simple interest rate.
So, if ever you encounter 'Anuradha' and she talks about the scheme to double your money in 25 days, play
smartly.
