Financial Fix The Power Of Compounding: Rule Of 72 Explained

(MENAFN- Kashmir Observer) Using the Rule of 72, we can quickly estimate how long it takes for an investment to double given a constant annual growth rate (CAGR). Here's a closer look at how this rule applies to two different growth rates:
1. At 9% CAGR:

Calculation: 72 ÷ 9 = 8 years to double. In 20 years:

The investment doubles 2.5 times (20 ÷ 8 ≈ 2.5).So, ₹10 lakh doubles as follows:
₹10 lakh → ₹20 lakh (8 years)

₹20 lakh → ₹40 lakh (16 years) ₹40 lakh → halfway to ₹80 lakh, approximately ₹56 lakh (20 years).
2. At 18% CAGR:

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Calculation: 72 ÷ 18 = 4 years to double. In 20 years:

The investment doubles 5 times (20 ÷ 4 = 5).

So, ₹10 lakh doubles as follows:

₹10 lakh → ₹20 lakh (4 years) ₹20 lakh → ₹40 lakh (8 years) ₹40 lakh → ₹80 lakh (12 years) ₹80 lakh → ₹1.6 crore (16 years) ₹1.6 crore → ₹3.2 crore (20 years).

Summary:

At 9% CAGR: ₹10 lakh transforms into approximately ₹56 lakh, doubling 2.5 times over 20 years.

At 18% CAGR:₹10 lakh transforms into ₹3.2 crore, doubling 5 times over 20 years.
Understanding the Impact of Compounding
The Rule of 72 is a fundamental concept in financial literacy, illustrating the significant impact of compound interest. This principle underscores the importance of understanding Compound Annual Growth Rate (CAGR), a critical metric in evaluating investment performance.
Key Takeaways
1. Compounding is often referred to as the 8th wonder of the world because of its exponential impact over time.

2. Educating oneself on international financial standards and metrics like CAGR is vital for making informed investment decisions.

3. Even small differences in growth rates can lead to vastly different outcomes over long periods. For example, a 9% CAGR versus an 18% CAGR results in a substantial difference-₹56 lakh versus ₹3.2 crore over 20 years today's fast-paced and busy world, it's essential to take the time to understand how your money can work for you. The knowledge of financial principles like the Rule of 72 can empower you to maximize your investments and achieve greater financial security. Remember, small increments make a significant impact over time. Investing time in financial education can yield substantial rewards in the long run.

Learn from the insights of @Irshad Mushtag, Writer, Investor, Entrepreneur & Founder of M I Securities! Connect for valuable financial advice at [email protected]

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