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Thursday, May 19, 2011

The rule of 72- when my money shall be doubled?

Having invested money in infrastructure bond (with lock-in of 10 years) at the coupon rate of 10 percent, Mr. Joshi was feeling great till his morning-walk friend told him that there is no compounding of interest.
Mr. Joshi was juggling with the thought, had there been compounding, when his money would have doubled!
Since school days he was weak in maths and calculation of compounding set shivers in his spine.
For people like Mr. Joshi ‘rule of 72’ is a real reliever.
Just divide the 72 by ‘rate of return’ and one shall get years in which his money shall be doubled.
In Mr. Joshi’s case, divide 72 by 10, which give 7.2 years.
Had Mr. Joshi invested in an FD with ‘compounding interest option’ at the coupon rate of 10 percent, in 7.2 years his money would have been doubled.
This trick also works other way round, if he wants his money to double in 6 years what should be the rate of return?
Again divide 72 by 6 which give 12 percent rate of return.
This ‘rule of 72’ gives pretty clear idea to those who find CAGR calculations difficult.
SO, you have to tell me how many years it shall take to double my money at the coupon rate of 4 percent?

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