By Omang Khurana November 30, 2020 In Uncategorized

THE RULE OF 72 AND HOW TO USE IT IN FINANCIAL MATHS

In the world of financial mathematics, there are many magic numbers that help wealth consultants and other finance professionals’ in estimating the timelines of various investments. In this blog we are going to explore the RULE OF 72 and is simple applications.

APPLICATION 1: Time to double your money at a fixed rate of interest/return on investment

If you divide 72 by the rate of interest, you get to know the number of years it will take for you to double the money.

Example:
If the rate of interest is 9% p.a, simply divide 72 by 9% and the answer is 8. Thus, it will take 8 years to double your money if you invest at 9% p.a. rate of interest.

APPLICATION 2: Rate of interest/return on investment to double your money in a fixed time

We will use application 1 in reverse to know the rate of interest needed to double your money to achieve your set goal.

Example:
If you have INR 25000 today and you need INR 50000 in 5 years. Divide 72 by 5 years, the answer is 14.41% p.a. Thus, if you choose an investment vehicle that offers you 14.41% p.a. rate of interest/return, you will be able to double you money in 5 years.

APPLICATION 3: Time taken by inflation to make your money half

Inflation is the erosion of the purchasing power of your money over a period of time. This Rule of 72 helps you to calculate the time needed for inflation to make the real value of money half.

Example:
Assuming inflation today is 7%. If you divide 72 by 7%, the answer is 10.28 years. This means, if you have INR 100000 in your bank account today, in 10.28 years for the value of the money to be halved to just INR 50000.

In the above 3 applications, we have understood the applications of the Rule of 72, one of the magic numbers of financial mathematics. You can check the derivation of the Rule of 72 from this hyperlink.

Alternatively, just knowing the Rule of 72 will alone is not a solution to all your financial management. It only gives you estimations based of numbers the answers to which will be same for everyone.

To optimize your financial management, just like you have a family doctor, you must have a professional Wealth Consultant to personalize and customize financial solutions for all your life goals and building your net worth.

To book a complimentary meeting with a Wealth Consultant (Chartered Wealth Manager) go to WealthOK.in and book an appointment.

One Comment

  • Greg Cains December 10, 2020

    I like the technique, its easy to practice!

    Reply

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