Ever asked yourself, What would be the easiest way possible to calculate the no of years does it takes to double my deposit or money with a finite rate of compound interest? or tried using all the fancy math possible and made it everything complicated in the end? If yes today you are on the right platform. Let us simplify the process with a simple rule in financial management called ” Rule of 72 “.
Rule of 72
The rule of 72 is used to estimate the no of years required to double your money or deposit at a given annual rate of return. This method is replacement of fancy math which makes calculations complicated in the end.
Let us take an example in the both the methods to have clear insights on, why the rule of 72 is widely used apart of fancy math. so, lets get started!
Let, principal = $100
rate = 10% and n = number of years
Q) How long does it takes to double the principal at a rate 10% compounding annually?
1. Fancy Math Method
Principal(100%+10%)n = 200
100(100% + 10%)n = 200
(1 + 10/100)n = 200/100
(1.1)n = 2 (Now taking logarithms on both the sides)
n = log2/log1.1
Check out here to have a clean idea about simple and compound interests
2. Rule of 72
The rule states that to divide the rate with 72. It’s as simple as that! so, lets check this out