Rule Of 72 - What You Must Know

In personal finance, many a times, we use certain quick and easy calculations to find out investment or insurance related insights. ‘Rule of 72’ is one such calculation method to find out how many years it would take to double our investment given a certain compounding rate of return. But how accurate is the result? Can you trust the result for critical high value calculation? Read on.

Let’s start with an example of using Rule of 72. Say we are assuming that our investment will give a return of 9% p.a. Now if I invest Rs. 1 lakh in this product, by when my investment value would become Rs. 2 lakhs then? If we use Rule of 72, then we can find the answer the below way:

No. of years to double my investment = 72 / Given rate of return = 72 / 9 = 8 Years

So, after 8 years, my investment of Rs. 1 lakh will become Rs. 2 lakhs. Let’s verify this result with an Excel function viz. NPER:

=NPER(9%, , -100000, 200000,) = 8.0432 Years

The difference is of almost 15 days. Still the result is quite close compared to what we found using Rule of 72.

Now, let’s assume a higher rate of return e.g., 18% from my investment – rest everything remains the same. Number of years would take to double the money –

Using ‘Rule of 72’:

=72/18% = 4 Years

Using Excel NPER function:

=NPER(18%, , -100000, 200000,) = 4.1878 Years

The difference is now of almost 73 days. So, the accuracy of result is getting compromised here.

The conclusion is:

The ‘Rule of 72’ works well or serves the purpose in most cases. But if accuracy really matters for you, then you must remember that Rule of 72 works best or gives quite close to accurate result when the assumed rate of return is between 6% to 10%.