If you invest an amount, there is substantial growth in the money over some time. The money may even double due to the compounding of the returns. With the method of the “Rule of 72,” you can calculate the time that will make your money double
Number of years to double the money = 72 / Interest Rate
The doubling period calculation can be done by “Rule of 72” if you invest money in different investment options like fixed deposits, savings accounts, mutual funds, etc.
assuming that the fixed rate of interest is:
1%, it will take 72 years to double your money (72 / 1 = 72)
4%, it will take 18 years to double your money (72 / 4 = 18)
8%, it will take 9 years to double your money (72 / 8 = 9)
12%, it will take 6 years to double your money (72 / 12 = 6)
It is a reasonably accurate formula and more so while using lower interest rates than higher ones.
If your money is kept in a savings account that earns just 4%, it will take 18 years to double your money.
If you have extra savings, you’re probably better off keeping it in a high-yield account like a fixed deposit or other securities that offer little higher interest rates, say up to 6%. It would take around 12 years to double the money.
Likewise, you can calculate for investment in mutual funds. Considering that the average annualised return on investment comes out to be 8%, one can double his money after approximately nine years.
The results of “Rule of 72” enables you to analyse various investment options. As per the above formula, the more the interest rate, the earlier the money will be doubled. However, the more the rate of interest, the higher is the risk.
Vice-versa, the “Rule of 72” can also be applied for calculating the number of years that it will take to double your money for others. For example, any gold loan is taken by the lender at an 18% rate of interest. It will take four years for the lender to earn double your money.
Hence, one can calculate and make decisions based on the above method and evaluate the risk and return. The portfolio can mix low-risk and high-risk instruments, depending upon the investment goals set and many other factors.