Did you know?
We all know the Seven Wonders of the World. But
did you
know, the “Power of Compounding” is called the Eight wonder of the
world? Compounding
is nothing but the returns earned by re-investing the income
earned till
previous period. This can be explained by the “Rule of 72”. With
the help of
“Rule of 72”; you can calculate how much time does it takes to
double your
invested amount with a specified rate of return or vice-versa
(i.e. how much
return you required to earn to double your invested amount within
a specified
duration).
“Rule of 72” says that, to calculate required
rate of return
/ time (in years) it takes to double your money; you need to
simply divide it
by the time (number of years) / rate of return on your investment.
- Time = 72 / Rate of Return
- Rate of Return = 72 / Time
Illustration 1:
If an investment earns 8% per annum, how
much time will
it take to double the investment?
Solution:
Time = 72 / Rate of Return
=
72 / 8
=
9 years
Illustration 2:
How much return you need to earn to double
your investment
in 6 years?
Solution:
Rate of Return = 72 / Time
= 72 / 6
= 12%
