CAGR Compound interest simplified



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Rishi Kashyap
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CAGR Compound interest simplified


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No Investment tutorial is complete without mentioning Compound Interest.
All of us have been taught about compound interest in our primary schools !

Compound interest formula is as below
cagr compound interest formulaThe Principal or Investment amount increases in value depending on the rate of interest you receive on that amount per year. The principal plus the return gets re-invested again and again each year and hence annual compound interest.

Most term deposit or fixed deposit (FD) as called in India, is basically return (interest rate) compounded annually, and that rate is mentioned in your fixed deposit receipt. At the time of writing this stock market course on Feb 2022, normal FD in India would give you a return of 5 to 6%. This rate of return expected is risk free and is called a risk free investment. Obviously once you are investing in stocks you are expecting more returns than this ! In USA and many countries there is no investment like FD and they have risk free investment opportunity in Government bond which gives an expected return between 2 to 8 %.

In investment however you will frequently hear about CAGR or Compounded Annual Growth Rate.
Most investment do not come with a Interest rate defined ! Think about it, most of the times you are investing X amount of Rupees and after 15 years it has become 4X so what you are interested is in CAGR or at what rate has the investment compounded ? This simply helps us in comparing our return with the risk free investement alternative available to us !
 
For accurate return calculation we have made CAGR Calculator however an approximate return can also be calculated by applying Rule of 72 as detailed below.

Value Investing Growth Investing Stock Market Course Financial Independence FINANCIAL PLANNING

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Rishi Kashyap
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X Rule of 72
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Rule of 72 is a method or formula by which you can calculate either

  1. Approximate rate of return you expect to double your money in X years OR
  2. Approximate Years it will take to double your money at X % rate of return.
For example if you are expecting around 10 years to double your money then 72 / 10 is nearly 7.2 % return you expect.
The other way to say is if you expect 7.2% returns then amount of year it will take to double your money is approximately 10 years. Rule of 72
Rule of 72 applied for different rates expected to double your investment
Rate expectedYears to double
3 %24.0 years
4 %18.0 years
5 %14.4 years
6 %12.0 years
7 %10.3 years
8 %9.0 years
9 %8.0 years
10 %7.2 years
11 %6.5 years
12 %6.0 years
13 %5.5 years
14 %5.1 years
15 %4.8 years
16 %4.5 years
17 %4.2 years
18 %4.0 years
19 %3.8 years
20 %3.6 years
Rule of 72 applied for different years expected to double your investment
Years to doubleRate expected
3 years24 %
4 years18 %
5 years14.4 %
6 years12 %
7 years10.3 %
8 years9 %
9 years8 %
10 years7.2 %
11 years6.5 %
12 years6 %
13 years5.5 %
14 years5.1 %
15 years4.8 %
16 years4.5 %
17 years4.2 %
18 years4 %
19 years3.8 %
20 years3.6 %
Rule of 72 became famous because it helps us to calculate easily the approximate CAGR for double returns.
For other multiple returns or more accurate results it is better to use a calculator like our CAGR Calculator.

VALUE INVESTING GROWTH INVESTING FINANCIAL INDEPENDENCE FINANCIAL PLANNING Stock Market Course

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tags  FINANCIAL PLANNING STOCK MARKET COURSE

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