A measurement of returns!
The best way to double your money is to fold it in half and put it back in your pocket.
Besides the smart and lazy way of doubling money, we have the goal of generating an increase in our capital. And a quick, easy way to measure the doubling of money helps in putting our investments into perspective. Knowing the timeline for the milestones in monetary growth is comforting and helps plan some investments, in particular in the fixed-income segment of our asset allocation.
Some old and simple rules provide tools to calculate, with our fingers or on the back of an envelope, the time to multiply our money. The most basic of these measures is
The Rule of 72. The simplest measure to calculate the time to doubling money. This takes about as much time to work out as to fold that money and put it back in your pocket.
72/rate of interest provides a very simple, and reasonably reliable calculation of the time taken for the money to double. It even considers annual compounding. For example, an investment made at 8% interest will double in 72/8 = 9 years! Tada, it’s that simple! A satisfactory, tip of the fingers way to get an excellent approximation. Yes, approximation as it is not perfectly precise.
Flipped, if we have the assurance of time to doubling our money we can find out the interest rate. If money is to double in 10 years, 72/10 = 7.2% is the rate of interest.
A very precise rule for doubling money is the Rule of 69. (69/rate of interest) + 0.35 gives a very precise time taken to double the money. This measure is essential for students of finance to know, but for common use, the ‘Rule of 72’ goes a long way.
Extracts of the rule of 72 take us to other simple calculations. Time taken to triple money is the Rule of 115. 115/r, r being the rate of interest is a quick fix method if the need to calculate the time taken to triple our money is needed. To take an example, if the rate of interest is 8%, the time it will take to triple (for Rs. 100 to become Rs. 300) is 115/8 = 14.37 years (14 years and 4 months approximately).
Rather obvious is the Rule of 144. Money doubling uses the rule of 72, doubling that is the Rule of 144 which calculates the time to quadruple money. At a 12% rate of return, the formula tells us that money will grow 4 times in 12 years (144/12 = 12).
These are simple mathematical rules to help us put a time or return target to our financial goals. Knowing these rules will guide us to calm down an aggressive, and maybe less than an honest salesperson. But most importantly we can get an idea of whether our returns targets are too aggressive, or too low. They also help link us to our risk profile – expecting money to double extremely quickly, say in 2 or 3 years, could be about as fraught with risk as betting on racehorses. And not as much fun as folding the money and replacing it in the pocket.