Every time you invest in a scheme, you might wonder how long it would take to double your money. If you put your money in the right places, it can grow significantly over the years. It could even double or triple, all thanks to the power of compound interest. But how much time will it exactly take? Well, back of the envelope calculations may not be entirely accurate to the last decimal but that can give a fair idea about your return from any investment. There is a simple rule that will tell you how fast your money could grow — Rule of 72 and Rule of 114. Use them judiciously to make informed investment decisions.
Rule of 72
This rule will tell you how many years it will take for your money to double. The formula is simple — Divide the rate of interest the scheme is offering, by 72 to know the amount of years it would take to double your investments. There should be a particular rate of return.
Number of years required to double your money = 72/Rate of Return
Here’s an example for you
Suppose you are investing 50,000 in Public Provident Fund (PPF) this month. The central government has fixed the interest rate for PPF at 7.1 per cent for the July-September quarter. Now, you divide 72 by the rate of interest (7.1 per cent) to know the time it will take for Rs 50,000 to become Rs 1 lakh. So 72/7.1 will be 10.14. Hence, you money will double in 10.14 years, assuming the interest rate is fixed at 7.1 per cent.
How to Triple your Money
So now if you are eager to know how much time it will take to triple your money, you need to use the Rule of 114. It works the same way as the rule of 72. You have to divide 114 by the interest rate to know the amount of years it will take to triple your return from investments.
Number of years required to triple your money = 114/Rate of Return
With 7.1 per cent interest rate from PPF account, it will take 16.05 years for Rs 50,000 to become Rs 1,50,000.
It must be noted that Rule of 72 takes into account the annual return. It can be applied across all kinds of durations provided the rate of return is compounded annually. So if you apply the same rule to count your quarterly or half-yearly compounded return, it will not give you the exact figure.
How Much Return you will Need
You can also use these rules to know how much interest you will need to double your money at a specific time. As we all have a financial target in mind while investing, this rule will come handy.
Rate of return required to double your money = 72/ Number of years
Here’s How it Works
Let’s assume, you want to double your investment in six years. Divide 72 by 6, which will be 12. So you need to invest in a fund which will give you 12 per cent yearly return to double your money in six years.
Rule of 72 is one of the three essential personal finance topics that can help you understand investments and returns. So next time any you see an advertisement that this scheme will double your money, just do this quick calculation to gauge the the actual benefit from the scheme. Compounding formula works best if you start investing early.