Let’s understand it with an example. Suppose you want to invest ₹1 lakh in a bank fixed deposit at 5%. Divide 72 by the rate of interest (5%) to know the time it will take for ₹1 lakh to become ₹2 lakh. So, 72/5 will be 14.4 years. Hence, every 14.4 years, your money will double up if the interest rate is 5%.
If your equity returns are an average of 10% every year, your money will double in 7.2 years (72/10). The thumb rule is generally used for fixed-rate instruments and not for volatile asset classes like equities.
You can also reverse this rule to know how much interest rate you need to double your money in a specific time. For example, if you want your money to double in, say, five years. Divide 72 by 5, which will be 14.4%. So, you will need 14.4% interest rate to double your money in five years.
The thumb rule also shows how your investment will compound over the years. At 5% fixed deposit returns, your ₹1 lakh investment will become ₹3 lakh in about 29 years and ₹6 lakh in almost 43 years. The rule helps to simplify the compounding calculation.
It also shows investors that the early they start in life, the better it would be for them. Yes, you do need your investments to get the best rate of return to grow your wealth. But if you give more time for them to grow, you will eventually create wealth in the long term.
Patience and discipline are, therefore, key to growing your wealth.