Microsoft Excel is an exceptionally easy bookkeeping software program. But did you know that Excel can also be used to perform the Rule of 72 calculation? For the uneducated, this rule is a simple mathematical shortcut that helps investors estimate how many years it will take them to double their money given a known interest rate, or known compound annual rate of return. For investors at a crossroads who are faced with deciding between two or more investment options, the Rule of 72 can help them make more educated decisions based on their risk tolerance, time horizon and long-term investment goals. best align with.
a usage example
Let’s say you want to compare the estimated number of years it will take for five different investments to double, with expected rates of return of 5%, 10%, 13%, 15% and 20%. Using Microsoft Excel, this exercise can be achieved by performing the following iterative steps:
- Increase the width of columns A, B, C and D by right-clicking on each respective column.
- Left-click on Column Width and change the value to 35.
- Make the typeset for headings bold by pressing the CTRL and B keys together.
- Enter “expected rate” in cell A1, “actual number of years” in cell B1, “number of years using the rule of 72” in cell C1, and “difference” in cell D1.
- Enter “5” in cell A2, “10” in cell A3, “13” in cell A4, “15” in cell A5, and “20” in cell A6. The formula used to calculate the actual number of years it will take for your investment to double is the natural log of two divided by the natural log of one and the expected rate of return.
Values in cells A2 to A6 should be expressed as a percentage to calculate the actual number of years it would take for the investment to double. Therefore, the values must be divided by 100. To accomplish this, take the following steps:
- Enter “=(LN(2)/(LN(1+A2/100)))” in cell B2.
- Left-click and hold the bottom right corner of cell B2 and drag the cell down to cell B6.
- Now, in cell C2, “=72/A3” in cell C3, “=72/A4” in cell C4, “=72/A5” in cell C5 and “=72/A6” in cell C6.