What is Rule of 69
Rule of 69 is a general rule to estimate the time that is required to make the investment to be doubled keeping the interest rate as continuous compounding interest rate i.e. interest rate is compounding every moment. It does not provide the exact time but very close to proximity without using the pure mathematical formula.
Rule of 69 Formula
Type of Rules
Types of rules for calculating the no. of years take to make the investment double.
- Rule of 72: It is used for the simple compound rate of interest.
- Rule of 70: It is used when the interest rate for the financial product is of compounding nature, not of continuous compounding.
- Rule of 69: It is used when the interest rate is given is continuous compounding.
Examples of Rule of 69
Below are some of the examples of the rule of 69.
If an amount of $1 Mn is invested at the rate of 10% then how much time will it take to make our investment to become $2Mn
Calculation of doubling period will be –
Doubling Period = 69/10
Doubling Period = 6.9 Years.
Consider the same example, if the ask was how much time it will take to become 8 Mn then we consider simple find it as
Total time will be 27.6 Years
If there is security whose compounding rate of Int. is as follows, determine the time required to make if double.
Calculation of doubling period will be –
Benefits of Using Rule 69
The following are the benefits of the rule of 69.
- It assumes that the interest is continuously compounding, in fact, that it is true to think in the case of equity valuation that is compounding on an instant basis.
- It provides the answer very close to the answer obtained by using a financial calculator.
- It is even considered as the thumb rule of the investment return generating a cycle.
- Easy to calculate the time required.
- Even the retail investor or a non-finance person can easily determine the result.
- Can be used by any person without understanding the pure logic.
- Faster decision making and improve thought process.
Limitations of Using Rule 69
The following are the limitations of the rule of 69.
- Difficult to explain the logic behind the number 69.
- Rule 69 does not apply to everything. Only the security like equity which is compounding every minute can provide the exact value (Rule 72 can Be help in those cases)
- If the rate is too less like 2/3 % Per annum than the result is not very accurate. Generally, the higher rate is well captured by this formula.
- Projects with a heavy investment need specially designed spreadsheets because a minuscule difference in time and rate of interest value can create a difference of millions.
- Difficult to absorb the value derived because of non-transparency of value derivation.
- This rule covers those instrument which compounds continuously like equity shares but it ignores the dividend component which is also received by the equity holder so overall the share did not increase by an exact multiple of 2 but the dividend amount makes the value of it.
- It is better to understand first that before applying rule 69, check whether the security or case on which we are applying model is compound on a regular basis or have a different pattern.
- There is a category between 69 to 72 for the denominator part. As the continuous compounding decrease to become normal compounding, we shift from rule 69 to rule 72.
- It can be said that the time required to make the investment double is inversely proportionate to the interest rate, so if the interest rate is increased then there will be less time required to make it double.
- It always needs to remember that the answer provides hereby is not the exact answer so it needs to cover only the cases where the just a normal side by the figure requires not the exact time.
- It is used only for the financial items which are using the continuous compounding interest rate as the compounding form, So not applicable generally on the loan given by banks to the customer (Compound interest is applied in that case) or unsecured loan is given or taken from others. (Simple interest is applied).
- This formula works only in the condition where the interest rate does not change in between i.e. similar rate throughout the period otherwise the result can deviate from the result obtained using this rule.
- People are concerned with the investment horizon only if the amount involved herewith is huge in size. If required dedicated complexity calculative sheet to determine so not reliable for those projects and even the little change in a variable can have a serious impact on deciding whether to do the project or not, so not worthy of using it.
This has been a guide to what is Rule of 69 and its meaning. Here we discuss formula to calculate the doubling period along with its examples, benefits, and limitations. You can learn more about accounting from the following articles –