Rule of 72 Definition

Rule of 72 Formula

In simple terms, it helps us understand when we can double our investment.

As an investor, you need to know the rate of returnRate Of ReturnThe real rate of return is the actual annual rate of return after taking into consideration the factors that affect the rate like inflation. It is calculated by one plus nominal rate divided by one plus inflation rate minus one. The inflation rate can be taken from consumer price index or GDP deflator.read more. And then, all you need to do is to take the number 72 and divide it by the rate of return. And you will get the duration of time that will double your investmentTime That Will Double Your InvestmentThe doubling time formula measures the time taken by an investment to become twice its present value. Doubling Time = ln 2 / [n * ln (1 + r/n)]; where r is the rate of return and n is the number of compounding period per year.read more.

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Here, r = the rate of return

Alternatively, there can be another 72 rule formula.

Here, you would be able to know the rate of returnRate Of ReturnRate of Return (ROR) refers to the expected return on investment (gain or loss) & it is expressed as a percentage. You can calculate this by, ROR = {(Current Investment Value – Original Investment Value)/Original Investment Value} * 100read more at which you would be able to double your investment.

Here. t = duration of time

Example

  • = 72 / r = 72 / 9 = 8 years.It will take eight years to double the money.

Coming to the next question, we can use the second formula of Rule of 72.

  • = 72 / t = 72 / 6 = 12%.At a 12% rate, the investors can double the money within six years.

Interpretation

Let’s understand the above two equations in detail.

The first formula is all about “when.”

And the next formula is all about “what rate.”

  • In the first formula, the investor isn’t sure about the time duration of the investment. She needs to use the formula to conclude.In the second formula, the investor isn’t sure about the rate of return on the investment. In other words, in the second formula, the investor isn’t sure at what rate she would be able to double her investment.

As an investor, you should use both.

  • Let’s say that you’re investing $100,000 into an investment. They are offering you a 10% return.Using the first equation, we can easily determine when you will double your investment.= 72 / r = 72 / 10 = 7.2 years.Let’s say the investor wants the money to double within six years.

What should she do in that case?

  • She needs to use the second equation to reach a conclusion. = 72 / t = 72 / 6 = 12%.To double the money the investor puts into the investment within six years, she needs to get a rate of return of 12%.

Use and Relevance

  • If an investor needs to know the basics about the investments, they should have useful formulas and, at the same time, can deliver quick results. It is very useful and can help investors quickly.Even if the investors don’t know anything about investment, they can quickly use these formulas to know the basics of the investments. However, the rule of 72 can’t act as substitutes for financial ratiosFinancial RatiosFinancial ratios are indications of a company’s financial performance. There are several forms of financial ratios that indicate the company’s results, financial risks, and operational efficiency, such as the liquidity ratio, asset turnover ratio, operating profitability ratios, business risk ratios, financial risk ratio, stability ratios, and so on.read more.

Rule of 72 Calculator

You can use the following calculator.

Rule of 72 Calculation in Excel

Let us now do the same example above in Excel.

This is very simple. You can easily calculate the ratio in the template provided.

This has been a guide to Rule of 72 Formula. Here we explain how this formula helps investors know when they can double their investments, along with practical examples. Here, we also provide you with the rule of 72 calculators used to figure out the cost or period when your investment is doubled. You may also have a look at these articles below to learn more about Corporate Finance –

  • Rule of 70Rule Of 70The “Rule of 70” refers to the total time it takes to double a quantity or value. It simply means how long it will take to double the money, investments, or profit assuming all other factors remain constant.read moreTaylor RuleTaylor RuleTaylor rule helps the Central bank to set short term interest rates when the inflation rate doesn’t match with the expected inflation rate. It suggests Central Bank the time to increase the interest rates.read morePresent Value FormulaSubstitute Function in ExcelSubstitute Function In ExcelSubstitute function in excel is a very useful function which is used to replace or substitute a given text with another text in a given cell, this function is widely used when we send massive emails or messages in a bulk, instead of creating separate text for every user we use substitute function to replace the information.read more