Rule Of 72 For Wealth Creation: What Is It And How To Use It To Retire Early, Retire Rich?

Are you dreaming of early retirement with a solid financial corpus? There are several strategies and formulas that financial experts recommend, and one of that is the Rule of 72. This formula helps you estimate how long it will take for your investments to double, giving you a clear idea of how your wealth can grow over time.

What is the rule of 72?

The Rule of 72 estimates the time required to double an investment by dividing the number 72 by the annual rate of return. For instance, if a mutual fund offers an 8% annual return, the investment will double in approximately nine years (72 ÷ 8 = 9). Conversely, the formula can also determine the rate of return required to double an investment within a specific timeframe.

For example, if you invest Rs 1,00,000 in a mutual fund which offers an 8% annual return, the formula estimates it will take approximately 9 years to double your money (\( 72 \div 8 = 9 \)). Similarly, if you aim to double your Rs 1,00,000 in just 6 years, the Rule of 72 reveals that you’d need an annual return of 12% (\( 72 \div 6 = 12 \)). This quick calculation helps set realistic expectations for your investments, making it easier to align them with your wealth-creation goals.

How to use the rule to retire early

Start early, invest consistently- The earlier you start, the more time your investments have to double multiple times. For instance, if a 25-year-old invests Rs 1 lakh at a 10% annual return, the corpus could grow to Rs 32 lakh by age 55.

Balance risk and return- Higher returns often come with higher risks. While equity funds may promise better growth, diversifying with safer options like debt funds can protect your portfolio.

Account for inflation- With inflation hovering around 6-7%, your money’s purchasing power could halve in 12 years. Choose investments that outpace inflation to truly build wealth.

Limitations of the rule

The Rule of 72 assumes consistent returns and ignores factors like market volatility and taxes. In India, capital gains tax, TDS on fixed deposits, and changing interest rates can impact real returns.

For example, an equity fund offering 12% returns may yield less post-tax if held for under one year. Similarly, fixed deposit returns often fall short of inflation-adjusted growth.