Money family #1- Rule of 72
Have you ever thought how much money you make out of your investment before investing your money? While it comes to investing, there will be different options, giving different interest rates. How do you choose among these? One easy option is to calculate how long it will take to double your investment, with the current interest rate.
Normally, to do such calculations, there are complicated compound interest formulae. But finding out the time taken to double your investment can be easily done using Rule of 72.
The process is simple. Divide the number ‘72’ with the interest rate you get on your investment, to find out how many years it’ll take to double your investment. For example, if you have an interest rate of 10%, it will take 7.2 years for your investment to double.
Now let us compare two investment options. One earns you 3% interest rate and the other 4%. Just one percent difference, right? But it is not the case when it comes to returns. At 3%, it takes 24 years for your investment to double. But at 4% it takes only 18 years. 1 percent can reduce 6 years.! In other words, higher the interest rate, the less time it takes for your investment to double.