Rule of 72 Formula

Rule of 72 Definition

Rule of 72 refers to an approximate approach of determining that how much time long term investment will take in getting double value at the fixed rate of interest and is calculated by dividing the annual rate of interest by 72.

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.

Rule of 72 = 72/r
Rule of 72

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For eg:
Source: Rule of 72 Formula (wallstreetmojo.com)

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.

Alternative formula

Here. t = duration of time

Example

You can download this Rule of 72 formula Excel Template here – Rule of 72 formula Excel Template

Deeds Inc. has been offering a 9% return on the investment of $200,000. Find out when the money will get double. Also, if the investors want to double their money in 6 years, what would be the available rate?

By using the first formula of 72 rule, we get –

  • = 72 / r = 72 / 9 = 8 years.
  • It will take 8 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 6 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 come to a conclusion.
  • 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 a sum of $100,000 into an investment. They are offering you a 10% return.
  • Using the first equation, we can easily find out when you will double your investment.
  • = 72 / r = 72 / 10 = 7.2 years.
  • Now, let’s say that the investor wants the money to double within 6 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 6 years, she needs to get a rate of return of 12%.

Use and Relevance

Rule of 72 Calculator

You can use the following calculator.

Rate of Return (r)
Rule of 72 Formula =
 

Rule of 72 Formula =
72
=
Rate of Return (r)
72
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0

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.

Rule of 72 in Excel

Recommended Articles

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 that are used to figure out the cost or time period when your investment is doubled. You may also have a look at these articles below to learn more about Corporate Finance –