Picture this: you’re sitting at a table, mulling over investment possibilities. Your mind races, calculating potential returns, weighing risks, and wondering about the timeline for your investments to double.
In the world of finance where numbers weave intricate patterns, the Rule of 72 emerges as a remarkable shortcut.
Before we get into the details, lets understand what Rule 72 is:
The Rule of 72 is just that – a shortcut that helps you estimate the number of years it’ll take for your investment to double based on an annual rate of return. The Rule of 72 is applicable to any asset experiencing compounded growth.
This code works both ways:
- It can assist you in determining the time needed for your investment to double.
- It can also aid in calculating the rate of return required to double your investment within a given timeframe.
The Rule of 72 is a simple formula that provides a reasonably accurate approximation without the need for complex calculations. The formula is as follows:
Years to Double = 72 / Annual Rate of Return
Let’s say you’re considering an investment with an annual rate of return of 8%. Using the Rule of 72, you can quickly calculate that it would take approximately 9 years for your investment to double (72 / 8 = 9).
Alternatively, if you’re interested in finding out what rate of return you need to double your money in a specific time frame, you can rearrange the formula:
Required Rate of Return = 72 / Years to Double
For instance, if you’re aiming to double your investment in 6 years, you would need an annual rate of return of approximately 12% (72 / 6 = 12).
Rule of 72 in Real Time
Imagine you have 10 candies, and every year the number of candies you can buy with your money goes down by 20% (1/5 of what you could buy before).
Using the Rule of 72, we can estimate when you’ll only be able to buy half as many candies as you can today.
Step 1:
Take 72 and divide it by the rate of decrease (20%).
Years to Halve Value = 72/ Rate of Decrease
Step 2:
Calculate. Years to Halve Value = 72 / 20 = 3.6
So, if the cost of candies keeps rising by 20% each year, it might take about 3.6 years for the candies you can buy to become half of what you can buy today.
In simpler terms, prices going up means you can buy less with the same amount of money. The Rule of 72 gives us a basic idea – in this case, around 3.6 years – of when things could get twice as pricey. Just remember, this is a basic estimate and doesn’t cover all the details of how prices change.
The Rule of 72 is versatile and can be utilized in a wide range of calculations and fields for interest rates traditionally falling within the 6% to 10% spectrum. However, for interest rates that deviate from this range, a calibration can refine its precision.When confronted with rates exceeding or falling below the 8% baseline, you can tailor the Rule of 72 accordingly. For every 3% departure from the 8% yardstick, you fine-tune the value 72 by either adding 1 or subtracting 1.
As an illustration, if the interest rate stands at 13%, which is 5% higher than 8%, you augment 72 by 1, yielding the Rule of 73. For a rate of 18%, presenting a deviation of 10%, you increase the value by 3, leading to the Rule of 75.
Conversely, when dealing with a 4% rate, 4% below 8%, subtracting 1 results in the Rule of 71.
The Rule of 72 proves its usefulness for several reasons:
- Simplicity: One of the most significant advantages of the Rule of 72 is its simplicity. It provides a quick estimate without requiring complex calculations, making it accessible to people with varying levels of financial knowledge.
- Quick Approximations: The Rule of 72 is a useful tool for getting a rough idea of how long it takes for an investment to double or for the impact of an interest rate change. It’s handy for making quick decisions without extensive number crunching.
- Memorability: The number 72 is relatively easy to remember, making it a convenient mental shortcut for making back-of-the-envelope calculations without the need for a calculator.
Let’s apply this concept to Ashton Gray’s investment model:
Initial Investment: 10 Lakhs
Rate of Return: 18%
Now, let’s make an adjustment by adding 3 to 72, resulting in 75.
Using this adjusted value: 75 / 18 = 4.16.
With Ashton Gray it takes approximately 4 years for your investments to double.
If you are someone looking to invest and multiply your wealth, you are at the right place.
Ashton Gray is a vertically integrated real estate investment and development company that has created a competitive advantage that yields higher returns for its investors. With its proven 100% return on capital track record, Ashton Gray is a leader in the private equity real estate arena.
