By using these personal finance rules, you can make the right strategy to double your investment in the shortest possible time.
If you keep financial discipline and follow the golden rules of personal finance, you can make the right strategy to double your investment.
Who wouldn’t want to double their money? That too without falling into the trap of some Ponzi scheme? But the question is, is it really possible to do this? If you keep financial discipline and follow these rules related to personal finance, then you can definitely do this. Let you know what these golden rules to double your investment are.
Rule of 72
Rule of 72 i.e. Rule of 72 can help you a lot in the way of doubling your investment. With the help of this well-known rule of personal finance, you can find out how long it will take you to double your investment. For this, you should know the average compounding rate of interest or return on your investment. According to this rule,
Doubling of money = 72 / yearly rate of compound interest
(Number of years required to double your money = 72 / Annual Compound Interest Rate)
i.e. if your investment is earning compound interest at the rate of 10% per annum, then your capital will double in 72 / 10 = 7.2 years.
With the help of this formula, you can plan your investments better by estimating a doubling of your capital.
Rule of 10,5,3
This rule tells us what average annual returns can generally be expected from different types of investments. Under this rule, investments are broadly divided into three categories –
- Stocks or shares,
- Debt instruments like Bonds, FDs and
- Saving account or other liquid investments.
According to this rule, the average estimated annual rate of return on these three types of investments is as follows:
- Shares or Stocks: 10% average annual return (high risk)
- Bonds or other debt instruments: 5% annual average return (medium risk)
- Savings deposit or other liquid assets: 3% average annual return (low risk)
Here all the average rates of return annually are given for long-term investments generally of 15 to 20 years. The rates of return have been deliberately kept conservative so that the risk of the projections not living up to the expectations is minimized. With the help of this rule, we can get an idea of the average return we can expect on our investments over a long period of time.
Use the previous two rules together
The maximum benefit of Rule 10, 5, and 3 will be when it is used in conjunction with Rule 72 for better planning. This means that by taking the estimated rate of return mentioned under Rule 10, 5, and 3 in the formula of Rule 72, you can estimate which of your investments is expected to double in how many years. Instance:
- The estimated return on investment in the stock is 10%. Hence the investment made in it can be expected to double in 72/10 = 7.2 years.
- The expected return in bonds or other debt instruments is 5%. Hence the investment made in it can be expected to double in 72/5 = 14.4 years.
- The estimated rate of return on investment in liquid assets like a savings account is 3%, hence the investment made in it can be expected to double in 72/3 = 24 years.
If you have a better and more accurate figure than the estimate of the rate of investment given in this rule, then you can also use it in Rule 72. For example, if you have invested in a government bank or bond for a long time and you know the actual rate of compound interest on it, then you can use it to make a better assessment.
The 100-Age Rule of Asset Allocation
The question is, should the investment decision be taken only on the basis of the rate of return? Experts believe that it is not always right to do this, because usually with high returns comes more risk. It is also important to keep in mind the age of the investor while deciding who should take the amount of risk while making the investment decision. Because responsibilities generally increase with age, which reduces the ability of a person to take financial risks.
This asset allocation formula is used to determine the amount of risk an investor should take at what age:
100-Age = % Allocation in Equities.
That is, the number that comes after deducting the age of an investor from 100, he should invest the same percentage in equity. For example, if an investor is 35 years old, then he can invest 100-35 = 65% of his portfolio in stocks. But if the age of the investor is 50 years, then he should invest 100-50 = 50% in the shares only. The rest can be kept in low-risk government bonds or FDs of big banks.
Make such a strategy to double your investment
By using the above-mentioned rules correctly, you can make a successful strategy to double your investment. For example, using the 100-age rule, you can decide what ratio you should invest in equities, bonds, and liquid assets. After this, you can estimate the return on each of these types of investments with the help of the Rule of 10, 5, and 3. And then by putting that estimated return in the formula of Rule 72, you can get an idea of which investment in your portfolio is expected to double in how many years.