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The Rule of 72 gives an accurate estimation of the doubling time for investment specifically with lower interest rates rather than higher ones
When it comes to investments, the first thing that strikes every mind is the return. Money invested properly and in the right instruments can give substantial returns as they work of power of compounding.
But, in many cases, one doesn’t know when the investment will double. So, instead of depending on financial planners and chartered accountants, one can use the Rule of 72 to know when the investment may double.
What is the Rule of 72?
In finance, the Rule of 72 is a formula that shows the estimated time for an investment to double in value, with a fixed annual rate of return. According to the rule, you just have to divide 72 with the the rate of returns to know the amount of time it would take to double your investments.
How does it work?
Suppose you deposit Rs 1,000 in a small saving scheme and get an interest of 10% annually. After one year you will have Rs 1,100. Next year, due to compounding, you will get 10% interest on Rs 1,100 and your money will increase to Rs 1,210 and so on. Over time, you will see your money increasing. Using the Rule of 72 you can calculate the time this Rs 1,000 will take to double by dividing 72 with the rate of interest (72/10=7.2) and you can get the number of years required to double.
Rate of doubling of some popular government schemes
Sukanya Samriddhi Yojana (SSY): SSY is gives an interest rate of 7.6%. If the interest rate remains stable, it will take approximately 9.4 years for your investment to double based on the Rule of 72.
Public Provident Fund (PPF): PPF is currently giving 7.1% interest. So, an investment of Rs 1 lakh will double in 10.14 years.
National Savings Certificate (NSC): Currently, 6.8% interest is being earned on NSC and going by the rule it will take 10.58 years to double the investment.
Conclusion:
The Rule of 72 gives an accurate estimation of the doubling time for investment specifically with lower interest rates rather than higher ones. It is used for investments involving compound interest and a simple interest rate does not work well with the Rule of 72.