Calculating Investment Returns using Rule of 72
Rule of 72 is a technique to determine how long it will take for an investment to double. The only part of information that you will require for calculation is the annual rate of return.
This rule applies to exponential decay or exponential growth, and hence used for calculating compound interest. The Rule of 72 is most precise with rates of return between 6 and 10 percent interest, while the estimations are less precise at a higher interest rate.
How to use Rule 72
In order to determine how long an investment will take to double, just divide 72 by the rate of interest.
For example, if $1000.00 is invested at a rate of 8% per annum, then according to Rule of 72, it will take 72 / 8= 9 years for the investment to be worth $2000.00.
In order to double your investment within a certain period of time, you can tumble this rule to find out the rate of interest.
For example, if $500 is invested for 9 years, then 72 / 9 = 8 (rate of interest). It means in 9 years $500 will double at the rate of 9% per annum.
Felix’s Corollary to the Rule of 72
It provides a method of determining the future value of an annuity (fixed payments over a specific period of time). Felix’s Corollary states that when N x R = 72, where R% is the rate of interest and N is the number of periods, then the final value of annuity is equal to the sum of payment multiplied by 1.5.
For instance if we pay $1500 per annum for 8 years with a rate of 9% per annum, then the final value of annuity (T) is calculated as:
Here, N = 8, R=9
Then, the final value of annuity (T) is calculated as
T = 8 x 1500 x 1.5 => T = 18000.