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Business News/ Money / Personal Finance/  Power of compounding: How Rule 72 and Rule 114 can double and triple your money?
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Power of compounding: How Rule 72 and Rule 114 can double and triple your money?

The Rules of 72 and 114 play a crucial part in determining personal financial decisions when it comes to the power of compounding since they enable investors to determine how long it will take to double or triple their money at a particular rate of return or interest rate.

When it comes to making decisions regarding their personal finances, investors should be aware of the power of compounding because it allows your earnings to increase over time as your investments ramp up because the instrument supported by the power of compounding reinvests the earned interest back into the principal amount resulting to grow your portfolio exponentially over time. (iStock)Premium
When it comes to making decisions regarding their personal finances, investors should be aware of the power of compounding because it allows your earnings to increase over time as your investments ramp up because the instrument supported by the power of compounding reinvests the earned interest back into the principal amount resulting to grow your portfolio exponentially over time. (iStock)

When it comes to making decisions regarding their personal finances, investors should be aware of the power of compounding because it allows your earnings to increase over time as your investments ramp up because the instrument supported by the power of compounding reinvests the earned interest back into the principal amount resulting to grow your portfolio exponentially over time. The Rules of 72 and 114 play a crucial part in determining personal financial decisions when it comes to the power of compounding since they enable investors to determine how long it will take to double or triple their money at a particular rate of return or interest rate. Since these two methods make it easier to predict how quickly your money will grow, investors may plan and manage their personal financial dealings effectively.

CA Manish P Hingar, Founder at Fintoo said “To create wealth in the long term, one needs to be patient, consistent and let the power of compounding work to help create the amount of wealth one desires. The most common queries investors have is how much time will it take to double or triple their money. Although there are formulas to calculate the exact answer, but it’s not very convenient, especially when you just need a quick estimate without having to open excel or a financial calculator. The simple way is to use the thumb rules which can be used without any calculator to get an approximate idea."

How Rule of 72 work?

CA Manish P Hingar said to understand how many years it will take to double your money, you can simply use rule of 72. You just need to divide 72 by the rate of return you expect to earn annually. For e.g., you would want to invest 5 lakhs in Equity mutual funds expecting a CAGR of 12% per annum. Simply, divide 72 by 12, which is 6. It means it will take 6 years to double your money.

Please note this is an approximate time and not the exact number of years. However, if you calculate the exact answer using the time value of money calculations, it would be 6.11 years which is very close to the result we get using the rule of 72.

You may also use this rule to find out at what rate you should be investing your money to double it within your desired time. For e.g., if you are looking to double your money in 5 years, then 72/5 = 14.4. It implies that you will have to earn 14.4% p.a. on your investment to make it double in 5 years.

How Rule of 114 work?

CA Manish P Hingar said Rule of 114 works in a similar way like the Rule of 72. The only difference is that this rule is used to find out how much time it will take to triple your money instead of double. So, if you divide 114 by 12, which comes to 9.5. It means if you invest your money at 12% CAGR then your money will triple in 9.5 years. The exact time will be 9.69 years if calculated in excel using the NPER formula. It shows that one can rely on such rules of thumb to get fairly accurate estimates.

How Rule of 114 and Rule of 72 allow for making better financial plans?

Nitin Rao, Head Products and Proposition, Epsilon Money Mart said compounding is nothing but the increase in your investments through interest as well as interests on interest. So say you invest 10,000 for 3 years @ 10% returns annually. You will be having 13,310 in your account by the end of the period.

Rule of 72= (72/expected returns)

So say you expect your Portfolio to return 12% CAGR over the long term, you will take 6 years to double your money

Rule of 114= (114/expected returns)

Let's say you expect your Portfolio to return 12% CAGR over the long term, you will take 9.5 years to triple your money.

Both these simple yet effective formulas can be deployed to know your future corpus that can be generated over a long period if investments are done in a disciplined manner.

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ABOUT THE AUTHOR
Vipul Das
Vipul Das is a Digital Business Content Producer at Livemint. He previously worked for Goodreturns.in (OneIndia News) and has over 5 years of expertise in the finance and business sector. Stocks, mutual funds, personal finance, tax, and banking are among his specialties, and he is a professional in industry research and business reporting. He received his bachelor's degree from Dr. CV Raman University and also have completed Diploma in Journalism and Mass Communication (DJMC).
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Published: 29 Jan 2023, 06:48 PM IST
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