What is the Rule of 72 when investing? | 9 personal finance rule that can help you double your money

They say investing is an art that can be learned through patience and discipline and of course from the mistakes of successful investors. THE rules of personal finance.

However there are few personal finance rules which can help you make better financial decisions and even double your money. That's right, double your money.

 In our three-part series we'll get you a low down on the nine golden rules of investing, that can help you do exactly that and in this blog we will be focusing on the first three rules.

The first of the three rules is the Rule of  72

 If you want to know how long it will take you to double your investment at a fixed interest rate the rule of 72 is the fastest way to do so. But how does it work well simply divide 72 by your annual compound interest rate and see how many years it will take for your investment to double. 

Didn't sound that simple, did it well to make it simple. let's understand what is compound interest, 

A compound interest is the addition of interest to the principal sum of loan or deposits or in other words interest on principal plus interest it is the result of reinvesting interest or adding it to the capital rather than paying it out so the interest in the next period is then earned on the principal sum plus previously accumulated interest.

Now this produces more earnings which can then be reinvested as well. 

For example if you deposit 10 000 rupees in an account that pays 5% annual interest you'd earn 500 rupees in interest after a year.

 Thanks to compound interest in year 2 you would earn 5% on 10,500 rupees. which is the principal amount plus the interest that would come to 525 rupees in interest payouts for that year.

 Similarly in year three you'd earn five percent on 11,025 rupees or 551.25 rupees and so on. and so forth it's a powerful cycle that can lead to incredible growth in albert einstein's words compound interest is the eighth wonder of the world.

the rule of 72-

 divide 72 by the annual compound interest rate that will give you the number of years that will take for you to double your money. so an investment of 10 000 rupees at an annual compound interest rate of 5% will double in 14.4 years.

 Now this is an incredibly useful tool for both retirement planning and long-term financial planning in general although you will also want to use a more in-depth projection method at some point the rule of 72 can serve as a great starting point.

 While it isn't the most accurate way of projecting returns, it allows you to see if you're keeping pace in a quick and basic way.

Next up is the rule of 70

Now in the rule of 70 the 70 represents the dividend or the divisible number in the formula. Divide 70 by your growth rate to know the amount of time it will take for your investment to double. For example if your mutual fund has a 3% growth rate divide 70 by 3 thus the doubling time is 23.33 years because 70 divided by 3 is 23.33 

let's say an investor wants to compare rates of return on the investments in the retirement portfolio to get an idea of how long it may take to double their savings to calculate the doubling time the investor would simply divide 70 by the annual rate of return.

An example at a 4% growth rate it would take 17.5 years for a portfolio to double that's because you divide 70 by 4 and at the 7 percent growth rate it would take 10 years to double. then your investments at an 11 percent growth rate would take 6.4 years to double your investments.

now the rule of 70 will only give you a rough estimate but it can come in handy if you want a more accurate way of looking at the potential of your investments knowing the number of years it could take to reach a desired value can help you plan which investments you want to choose for your retirement portfolio.

Now the third one is the 4 % withdrawal rule

According to this rule, retirees can safely withdraw four percent of their savings during the year. They retire and thereafter each year they can adjust for inflation for the next 30 years.

For example let's say your portfolio at retirement totals 10 lakh rupees you would withdraw 40 000 in your first year of retirement if the cost of living rises by 2% that year you would give yourself a percent raise, the following year and withdraw 40800 rupees and so on for the next thirty years.

 this rule is simple to follow and provide for a predictable steady income and if it is successful the 4% percent rules will protect you from running short of funds in your retirement.

 however this won't work unless a retiree remains loyal to it every year violating the rule one year to splurge on a major purchase can have severe consequences down the road because this reduces the principle which directly impacts the compound interest that the retiree earns for sustainability this brings us to the end of part one of the series.

 I'll be back with part two of the series with the next three golden rules of investment stay tuned.