The Rule of 72
Given an expected rate of return you can simply divide that number by 72 to determine the approximate years it will take you to double your money.
Expected rate of return is 10
72/10 = 7.2 years to double your money
Expected rate of return is 20
72/20 = 3.6 years to double your money
Expected rate of return is 8
72/8 = 9 years to double your money
It’s a simple and powerful hack that allows you to do the compounding without reaching for a calculator.
|Rate of return||The Rule of 72||Time needed to Double your money|
I find it very useful to compare investments by trying to determine how long it would take me to double my money. Eg. Over the past 35 years the BSE Sensex has given a return of over 16. So, on an average money invested there would have doubled every 4.5 years (72/16). A Bank FD gives you around 7% return. If you’re in the 30% tax bracket it’s equivalent to getting 4.9% return. Which means it will take approximately 14.5 years for you to double your money.
Note* This formula works best for interest rates between 6 and 10%, but it should also work reasonably well for anything below 20%.
The Power of Doubling
Now that you have started comparing investments based on the time it takes for your money to double you need to aim for maximum doubles with minimum time.
Let’s say you invest Rs 1,00,000 (1 lakh) and manage to double your money 5 times over – how much did you make? The answer is not Rs 5,00,000 (5 Lakh) – it’s actually Rs 32,00,000 (32 Lakhs). That’s 32 times your original investment.
Let me explain
You start with Rs 1,00,000 (1 lakh)
1st double – Your money double to Rs 2,00,000 (2 Lakhs)
2nd double – Your Rs 2,00,000 doubles to Rs 4,00,000 (4 Lakhs)
3rd double – Your Rs 4,00,000 doubles to Rs 8,00,000 (8 Lakhs)
4th double – Your Rs 8,00,000 doubles to Rs 16,00,000 (16 Lakhs)
5th double – Your Rs 16,00,000 doubles to Rs 32,00,000 (32 Lakhs)
In order to appreciate the power of doubling your money you need to memorize the power of 2 table below
|No. of Doubles||Investment Multiple|
Just imagine what happens to your investment when you manage 8 doubles – that’s 256 times your initial investment amount. 10 doubles gets you 1024 times your investment and 12 doubles 4094!
Let’s see the doubling impact on an Investment of Rs 5 lakhs.
|No. of doubles||Investment Multiple||Value||Value in Words|
|5||32||1,60,00,000||1 Crore 60 Lakhs|
|6||64||3,20,00,000||3 Crores 20 Lakhs|
|7||128||6,40,00,000||6 Crores 40 Lakhs|
|8||256||12,80,00,000||12 Crores 80 Lakhs|
|9||512||25,60,00000||25 Crores 60 Lakhs|
|10||1024||51,20,00000||51 Crores 20 Lakhs|
|11||2048||102,40,00000||102 Crores 40 Lakhs|
|12||4096||204,80,00000||204 Crores 80 Lakhs|
You should aim for at least 10 doubles in your lifetime. Remember that 10 doubles gives you 1000 times the initial investment. Focus on reducing the time it take for you to double your money.
If you manage a consistent 20% return you can double your money in 3.6 years. So 10 doubles would take you 36 years i.e can make 1000 times your invested money in 36 years. If you invest 5 lakhs you will make 51 crores after 36 years. After an additional 3.6 years (39.6 years) you will make 102 crores and after another 3.6 years (43.2 years) you will make 204 crores ! Thats the power of doubling your money!
In our earlier example of a Bank FD giving you 4.9% post tax returns – it would take you 145 years to achieve 10 doubles ! You are going to find it really hard (if not impossible) to create significant wealth using only Bank FDs and debt instruments.
Warren Buffet – the 3rd richest person in the world has managed over 17 doubles in his lifetime! He has compounded his wealth at 20%+ IRR in the past 60 years. Understand what 17 doubles did to his wealth – INR 1 lakh invested at the start would have grown to INR 1,300 crs.
This post aims to familiarise you with rule of thumb techniques that can show how money you park in different investments (equity, debt and so on) will grow over time. The concept of ‘Doubling’ is something you should have in mind when you choose an investment and compare it with others. You should also read more about Stock Markets are Stable in the long term for a better understanding of the equity markets.