Sunday, April 15, 2018

What is the rule of 72 and 69 in Finance - RBI GRADE B Finance Paper



Rule of 72 , 69, 114 and 144 in Finance to calculate the Double, triple and Quadruple of Amount Invested.
COMPOUNDING RULE 72
In personal finance, if you divide the number 72 by the rate of interest, you get to know the number of years it will take for you to double the money..
For Example : if the rate of interest is 9%, simply divide the number 72 by 9% and the answer is 8. Thus it will take 8 years to double your money if you invest at 9% p.a. rate of interest.

(72 / 9)  = 8 years
INTEREST:
We can use this rule in reverse to know the rate of interest needed to double your money to achieve your set goal.
For Example :  If you have 250,000 today and you need 500,000 in 5 years. Just divide the number 72 by 5, the answer is 14.41%. Thus you need a type of investment avenue, where you earn at least 14.41% p.a. as rate of interest/returns to double your investment amount in 5 years.
INFLATION:
This 'Rule 72' helps you to understand about inflation also. It helps you to calculate the amount of time it will take for inflation to make the real value of money half. Let's say present inflation is 5.5%. When you divide 72 by 5.5% the answer is 13.09 years. That is to say, if you have 100,000 in your kitty today, it would take around 13.09 years for the value of the money to be halved.

COMPOUNDING RULE 69
The Rule of 69 is used to estimate the amount of time it will take for an investment to double, assuming continuously compounded interest.
The calculation is to divide 69 by the rate of return for an investment and then add 0.35 to the result
For example, an investor finds that he can earn a 20% return on a property investment, and wants to know how long it will take to double his money. The calculation is:
 
  (69 / 20) + 0.35 = 3.8 years

COMPOUNDING RULE 114 - To Estimate How Long it takes to triple your Money or 

Investment, divide 114 by your expected interest rate or rate of return.


(114 ÷ 8) = 14.25 years

Similarly, Rule of 144 is used to check Quadruple of Money.




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