MONEY MATTERS-6

Rule of 72

When interest is compounded periodically, it is added to the principal for the next period and so on until maturity. Before we study about the power of compounding, let us see the Rule of 72 as a first step.

This rule is the rule of thumb to know the interest rate or the period of compounding, given one of them for DOUBLING a principal.

As per this Rule, a principal doubles approximately, when the product of interest rate and the duration (in years) is 72. This ‘72’ is constant. For example, where a deposit carries interest rate of 12 per cent, it doubles in 6 years. Similarly, a deposit doubles in 2 years when interest rate is 36 per cent; in 3 years when interest rate is 24 per cent;

in 4 years when interest rate is 18 per cent; in 5 years when interest rate is 14.4 per cent; and in 6 years when interest rate is 12 per cent.

This rule is useful to know approximately when an amount doubles at a given interest rate or to know the implied interest rate when the period in which the amount doubles is known. Test it and understand the basic of compounding. You can show yourself off as a wizard to those who’s ready new to this Rule.

We are now ready to devolve deeply into understanding the power of compounding. Wait for the next write up!