By Dinesh Thakkar
If you are reading this article to double your money in a few months or years, then I would give you a spoilers alert that you should stop right now. This article is not about giving you advice on how to double your money, but a simple rule which helps you to estimate how much time it takes to double your money.
Sometimes this simple rule also prevents you from falling into financial pitfalls when agents try to sell financial products to cheat you or take you for a ride telling that they will double your money in x time.
Rule of 72
I am sure many of you are familiar with the Rule of 72 . It is a simple formula which can be used to answer your question as to when one can double your money. This rule will give you an answer to two questions: How long will it take to double your money? What is the required rate of return to double your money?
Let us see the first question. Many investors wants to know how much time will it take to double their money if they park it in fixed return instruments. Let us take a popular debt instrument like PPF which gives return around 8%. The answer is to simply divide 72 by rate of return. In this case, it would be 72/8 and then the answer is nine years. If one invests for nine years in PPF bearing 8% return, he will get double the invested amount.
Another advantage of this rule is that one can estimate how much rate of return one needs to fulfill a future goal. For instance, if one wants to get their 11-year-old child married at the age of 26, he has 15 years to double the money. For this, they have to calculate rate of return by dividing 72 by 15 (72/15 = 4.8%). So the given person needs to find an asset class which gives him approximately 4.8% return and the amount will double in 15 years. So the Rule of 72 gives a basic idea here.
The Rule of 72 is simple maths which helps to understand the financial estimates. Many insurance agents try to fool you saying you can double your money in three years by investing in their product. They will say their product will give 18% return, but by dividing 72 by3, you know that they need to provide 24% annual return to double your money in three years. It sends a clear message to the person fooling you that you know enough maths not to be fooled.
Please note that the Rule of 72 is not 100% accurate, but gives you a fair idea. In real life, very few asset classes will give a fixed rate of return. Usually, rate of return in equity and commodity asset class varies so it would be difficult to arrive at exact duration for doubling your money.
I would like to end this article suggesting that all wealthy people had to take the slow lane to their riches. Keep your expenses in check, invest wisely and regularly and have a long-term orientation.
(The writer is CMD, Tradebulls Securities)