Before we look at the many ways to employ the power of Rule of 72 in making the right money decisions, let us quickly look at what the rule says.
The Rule of 72 says that if you know how much you earn on your investments, you can quickly calculate the approximate no. of years in which your investment would double — by simply dividing 72 by the annual returns.
For example, suppose you have put Rs.50,000 in a bank fixed deposit @9% p.a. interest. Then, as shown below, you will get back double the money i.e. Rs.1 lakh in around 8 years.
No. of years to double the money = 72 / Rate of return
= 72 / 9
= 8 years
So that is one way to use the Rule of 72. Whenever you decide to invest your money in any financial product, make sure to compute the likely time in which you will double your money. If you keep your money in Savings A/c (@4% p.a.) it will take 18 long years to double it. But if you move it to an FD (@8% p.a.) it will double in just 9 years.
Another way to use the Rule of 72 is to estimate how much returns you must get so that your money can double in a given time frame. Suppose you have Rs.1 lakh and you want double the amount after 6 years. Then, you have to choose your investment such that it gives 12% returns.
Required rate of return = 72 / No. of years
= 72 / 6
= 12%
Apart from the investments i.e. inflow of money, Rule of 72 can be used for the opposite i.e. outflow of money, for example your expenses / loans.
Suppose the inflation is 10%. Then your money will lose half its value in 7.2 years (=72/10). And if the Govt. succeeds in bringing inflation down to 6%, then your money will erode much slowly. Now its purchasing power will reduce to half after 12 years (=72/6).
Medical expenses are increasing by average 12% every year. Therefore, after just 6 years (=72/12), you will have to shell down double the charges for any treatment vis-a-vis today's costs.
Credit card outstanding amounts are charged interest at 30-50% p.a. So if you don't pay your bills now, in about couple of years you will become liable to pay double the amount. So now you can appreciate why experts always insist the credit cards bills must be paid off before the due date.
That, in short, is all about Rule of 72. Hope you use it more often.
