Sanjana: You know, when we’re saving for big life goals like our kids’ education or our retirement, it always feels like we are racing against time.
Akash: Absolutely and figuring out how long it will take for our investments to grow can be a real headache.
Sanjana: But what if I told you there’s a simple trick to estimate it? Ever heard of the rule of 72, 114 or the rule of 144?
Akash: No, what’s that?
Sanjana: Well, they’re easy formulas to estimate how long it’ll take for your investment to double, triple or Quadruple, just by dividing 72, 114 or 144 by the annual interest rate.
Akash: Wow, that sounds like a game-changer for easy estimation of our financial calculations!
Sanjana: Let me explain you in detail how these rules work
The investment rule of 72 is the most basic guideline that every investing institution applies, whether it is an investor, a fund house or your fund manager. It is a simple and effective way to determine how long it will take your money to double. The rule can also be used to calculate the rate of return required to double your money and it also helps to calculate the number of years needed to double your money with a given ROI.
Here’s how the rule of 72 works:
Time for investment to double = 72/percentage rate of return.
For example, if a Rs 2 lakh investment returns 12% a year, it will take (72/12) = 6 years for your money to double i.e. become Rs 4 lakh.
Rate of return = 72/no. of years
For example, if you want to estimate how much percentage returns your Rs 2 lakh investment will double your money in six years, it will take (72/6) = 12% so, your Rs 2 lakh investment in 6 years will give you 12% interest.
You can use this method to compare various investment options such as fixed deposits, bank savings, mutual funds and real estate.
The rule of 72 can also be used to calculate how long it will take for your money to halve due to inflation. For example, if inflation reaches 8%, your money will take (72/8) = 9 years to halve itself.
After the rule of 72 comes the Investment rule of 114 which tells an investor how long will it take for their money to triple itself.
Here’s how the rule of 114 works:
Time for investment to triple = 114/percentage rate of return
Going by the same example of a Rs 2 lakh investment with an annual return of 12%, the time it is going to take to triple your money would be (114/12) = 9.5 years.
Rate of return = 114/No. of years
For example, if you want to estimate how much percentage your Rs 2 lakh investment will triple your money in 9.5 years, it will take (114/9.5) = 12% so, your Rs 2 lakh investment in 9.5 years will give you 12% interest.
You can use this method to compare various investment options such as fixed deposits, bank savings, mutual funds and real estate.
Also Read: What is the Time Value of Money? A Lesson To Learn from Masala Puri
Rule of 144
The final rule in line is the Investment Rule of 144. As evident, this rule tells how long will it take for your money to become four times its original value or Quadruple. This rule is basically for people who stay invested for a long time to see their money become four times.
Here’s how the rule of 144 works:
Again going by the same example of a Rs 2 lakh investment with an annual return of 9%, the time it is going to take to Quadruple your money would be (144/9) = 16 years.
You can make use of these calculations to determine a rough estimate of the fund’s performance in terms of time value.
The rules of 114 and 144 might not give reliable results if you see the above examples, so it is best to rely mostly on the rule of 72.
Limitations
However, there is a limitation to the application of these rules. The rules usually work with common rates of return that are in the range of 5% to 12% and give a close estimate of time to double the money.
If you earn returns outside of this range, you can use adjusted rules example in rule 72, you can adjust to 71, 73, or 74, depending on the returns on your investment. Here is a simple thumb rule you can follow: For every 3 percentage points in increase, you generally add one to 72. So, if you earn a 15% interest rate, you can use the rule of 73 to estimate how many years are required to double your money.
The rule isn’t confined to investment growth. It can reveal how inflation impacts your money or unveil the sobering reality of credit card debt doubling over time.
Conclusion
The Rule of 72, 114 and 144 only gives an idea of how many years it will take to double, triple or quadruple your investments. However, the rule in itself is not a substitute for in-depth research and a robust financial plan. Thorough due diligence, understanding risks and perhaps consulting a financial planner are crucial steps before diving into the investment world.
Remember, the Rule of 72, 114 and 144 is a simple guide. Focus mainly on the rule of 72. Other rules of 144 and 144 are just for knowledge. Your financial journey requires a well-thought-out plan before investing.
Disclaimer: The above content is for informational purposes only. The 1% News recommends consulting a SEBI-registered investment advisor before investing.
