The Rule of 72

This is a little unknown rule-- but it helps us understand what the value of our money will be in future.

What the Rule of 72 answers is

Question: "How many years will it take to double your money if your money earns X% of Interest".

Answer: 72/X years

Hence if the money is earning interest @ 10% , it will take 72/10 = 7.2 yrs for your money to double.

If the money earns @15%, it will take 72/15= 6.8 yrs for your money to double.

Simple isn't it...but then finance is simple right?

Here is an example of how you can use this rule to understand how inflation will reduce the value of your money.

lets assume that inflation is going to be around 6% / annum .

Hence using the rule of 72... it will take 12 years for the amount to double.

So if i need 10,000 Rs a month as expenditure to live a decent life-- and i have another 24 years to retire ( 60 years-- which means i am 36 yrs now), I will need 20,000 Rs a month by the end of year 12 and 40,000Rs a month by the end of year 24!!

Assume I will live for another 24 yrs--- so by my 72nd birthday, I would be requiring 80,000 Rs a month and by my 84th bday 1.6L Rs a month to have the same lifestyle i am having today...

so use this as a simple calculation when an investment advisor comes and talk to you about growing your money or when you are doing investment planning and do not have an excel sheet or a calculator near you.

Think about using this rule to understand the power of compounding and why people suggest to start saving as soon as you can-- and how time can be a weapon for you or against you.. I will explain it in detail in my next blog.

Enjoy the rule--- I know i do.