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The Rule of 72 provides a wonderful illustration of the magic of compounding. To quikly approximate how many years are required to double the value of an investment, simply divide the rate of return into 72: a 4 percent return takes about 18 years; 6 percent, 12 years;10 percent, 7 plus years; and so on.

 

The following table shows how quickly money grows over various time periods at various at various rates. Note how the reward of higher return increases over time. At 4 percent, it takes 72 year-----a very long time horizon---- for the original investment to multiply 16--fold. But at 12 percent, it takes 24 years, only one-third the time,to grow 16-fold . After some 30 years, the investment compounding at 12 percent annually multiplies 32 times over, a multiple that the 4 percent rate would not reach until 90 years has elapsed.

 

More Magic

The Rule of 72 also works in another useful way for investors putting money away today so that they can receive income tomorrow. For any given rate of return, the Rule of 72 shows how many years you must regularly invest a given sum before you can stop investing and then start withdrawing the same amount without depleting your capital.

 

For example, if you invest Rs 1500 per month at a 6 percent rate of return, after 12 years (72 divided by 6) you could regularly withdraw Rs1500 per month and still leave your principal untouched. After 24 years, you could begin to make withdrawls of Rs.4500 per month. After 36 years, you could withdraw Rs10500 per month, and still preserve principal. But if your rate of return were 12 percent, your waiting time would be shorter: six years to begin Rs 1500 monthly withdrawals, 12 years for Rs 4500, and 18 years for Rs 10500. After 24 years, you could withdraw Rs. 22500 per month without impairing your principal---fully five times the amount possible at the 6 percent rate of return.

 

Using the Rule of 72

Compound Rate 18

2 Times

4 Times

8 Times

16 Times

32 Times

4%

18 Years

36 Years

54 Years

72 Years

90 Years

6%

12 Years

24 Years

36 Years

48 Years

60 Years

8%

09 Years

18 Years

27 Years

36 Years

45 Years

10%

07 Years

14 Years

21 Years

28 Years

35 Years

12%

06 Years

12 Years

18 Years

24 Years

30 Years

 
 
 
 

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