BM Finance Fundas: How rule of 72, rule of 114 can help you

By Anulekha Ray

Will investing Rs 1 lakh each year be enough for your future goals? Read on to know...

In this modern hustling world, every earning individual wants a safe place to store the earned money, and that’s where Saving Account comes into play.

While saving and investing for future life goals like children’s education, marriage and retirement, people are often worried whether they will be able to save enough money in the given time. When they park their hard-earned money in any instrument, one of the biggest questions they have is: How long will it take for this investment to grow? While there are mathematical methods and formulas, often they are too complex for many. However, what if we tell you that there is an easy way?

That is right, there is a quick and easy way to estimate the future value of your investment — the rule of 72 and the rule of 114. The rule of 72 is an easy way to figure out how much time is needed to double your investment money. Similarly, the rule of 114 tells you approximately the number of years needed to triple your money. How do they work? ET Wealth Online explains it for you.

How to use the rule of 72 and rule of 114

To understand the rule of 72 formula, you need to divide 72 by the expected annual rate of return. For example, say you invest Rs 1 lakh every year in an investment that earns 8% interest annually. Now if you divide 72 by 8, you will get 9 which gives you the number of years it will take for your money to double. So, your investment will grow to Rs 2 lakh in nine years.

By extending this rule it is also easy to find out the time it will take your investment to quadruple. Instead of 72 you just need to use 144 (2 x 72 = 144). For instance, if your return is 9% you need to divide 144 by 9 and you will get 16. So, it will take 16 years for your money to grow 4 times if the annual return is 9%.

While using this formula for any investment, you must keep in mind that it gives you an estimate and the years are approximate.

Additionally, the rule of 72 formula can be applied across all kinds of durations provided the rate of return is compounded annually. If you get a 3% interest per quarter (interest is compounded quarterly), then it will take (72/3) = 24 quarters or six years to double the principal.

However, there is a limitation to the application of this rule. The rule of 72 usually works with common rates of return that are in the range of 5% to 12% and gives a close estimate of time to double the money.

If you earn returns outside of this range, you can use an adjusted rule of 71, 73, or 74, depending on the returns on your investment. Here is a simple thumb rule you can follow: For every three percentage points in increase, you generally add one to 72. So, if you earn a 15% interest rate, you can use the rule of 73 to estimate how many years are required to double your money.

Similarly, the rule of 114 will tell you how fast your money will triple. In this case, you need to divide 114 by the annual rate of return. For instance, you invest Rs 1 lakh in an instrument that earns 12% return per annum. If you divide 114 by 12, you will see that it will take 9.5 years to triple your investment.

For a return of 12% per annum, your invested money will double in 6 years, triple in 9.5 years and quadruple in 12 years. Similarly, at 9% interest, it will double in 8 years, triple in 12.67 years and quadruple in 16 years.

How inflation is eating up your savings: Use Rule of 72 and Rule of 114 to figure out

With inflation, the Rule of 72 works in reverse. You can use the same formula to determine when your cash will lose half of its purchasing power. To find out you just need to divide 72 and 114 by the annual inflation rate. For instance, if inflation is 6%, the value of money will be half after 12 years, it will be one-third after 19 years and one-fourth after 24 years.