## Rule of 72 , Rule of 70 , Rule of 69

January 26, 2011 5 Comments

These are nifty rules of thumb to quickly calculate the years it will take to double our initial investment in a compound interest scheme.

The Rule of 72 is the basic thumb rule to be used in case of annual compounding.Rule of 70 is used in case of semi-annual compounding.Rule of 69 is for continuous compounding.

For example, to find out how long we have to wait for our principal to double in a scheme with an interest rate of 8% compounded annually,we have to divide 72 by 8 to get the answer 9 years.

We can also use the thumb rules to find out how fast the purchasing power of a currency will halve under an inflation regime.So if the annual inflation is 12% the purchasing power of the currency halves in 6 years.

Another cool use of the these rules is to figure out the impact of management fees,entry and exit loads,mortality charges, administration fees etc. of structured financial products such as mutual funds ,ULIPS and Pension Plans on potential gains. To find out the impact we divide 72 by the expense ratio. For example, if the mutual fund has an expense ratio of 2%, then in 72 / 2 = 36 years,half the potential gains have been lost because money deducted for various charges does not get the chance to compound.

As a foot note,let me add that the Rule of 72 is most accurate in the 6-12% range.Also we can extend the Rule of 72 out further,and determine other approximations for tripling and quadrupling. To estimate the time it would take to triple our money, we can use 114 instead of 72 and for quadrupling, 144.