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Everything has rules of thumb. In tennis, start with a good serve; for great writing, avoid using cliches; there is even a six-minute boiling rule for eggs. Then why should investing be an exception?
First, let’s look at the 10 rules to understand how fast your money can grow:
1. Rule of 72
We just want our money to double in value and look for ways to do so in the shortest time possible. The Rule of 72 makes estimating the number of years it would take for your money to double quite easy.
Take the number 72 and divide it by the investment product’s rate of return. The amount you will arrive at is the number of years it will take for your money to double. Let’s say you’ve invested Rs 1 lakh in a product with a 6-percentage-point return. When you divide 72 by 6, you get 12 as a result.
That means in 12 years, your Rs 1 lakh will have grown to Rs 2 lakh.
2. Rule of 114
The ‘rule of 72′ tells you how long it will take to double your income, and this rule tells you how long it will take to triple your money.
Rule of 114 has a mathematical formula that is close to Rule of 72. Divide the number 114 by the investment product’s rate of return to arrive at this result. The remaining years are the number of years it would take for your investment to triple. Hence, if you invest Rs 1 lakh in a product with a 6% interest rate, it will grow to Rs 3 lakh in 19 years according to the rule of 114.
3. Rule of 144
Two times 72 equals 144. As a result, the ‘rule of 144′ can simply be understood as a tool for calculating how many years your money can expand four times if you know the rate of return.
For example, according to Rule 144, if you invest Rs 1 lakh in a product with a 6% interest rate, it will grow to Rs 4 lakh in 24 years. To measure the number of years it would take for the money to raise four times, simply divide 144 by the product’s interest rate.
Now, as crucial as it is to understand how quickly your money rises, it is also critical to know how fast your money depreciates.
4. Rule of 70
This is a great rule to use when estimating how much your existing wealth will be worth in 10 or 20 years. And if you do not spend or invest a single penny from it, its value would be much lower than it is now. Inflation is to blame.
Divide the number 70 by the current inflation rate to arrive at this figure. The number you arrive at represents the number of years it would take for your money to be worth half of what it is now.
Consider the following scenario: you have Rs 50 lakh, and the current inflation rate is 5%. In 14 years, your Rs 50 lakh will be worth Rs 25 lakh, according to the law of 70.
5. The 10,5,3 rule
When we invest money or even consider investing money, we usually look for the rate of return on our investments. The 10,5,3 rule will assist you in determining your investment’s average rate of return.
Though mutual funds offer no guarantees, according to this law, long-term equity investments should yield 10% returns, whereas debt instruments should yield 5%. And the average rate of return on savings bank accounts is around 3%.