If Mr. A is earning 12% rate of return and inflation for the same period happened to be 8%. The real rate of return earned by him is..

Let’s first of all understand the concept of real rate.

Real rate is the adjusted rate. This adjustment can done with any rate say for example an automobile company’s sales has grown by 10% and the price rise during the year is 5%. The real growth in the sales of the company is

Real growth is [(1+0.10)/(1+0.05)]-1 = 4.76%

The equation above which we have used is **Fisher’s** equation.

In the case of Mr. A the answer is

[(1.12)/(1.08)] – 1 = 3.70%.

Hence we can say that Mr. A has earned 3.70% in terms of purchasing power even though the total rate of 12%.

** **The concept of real rate is useful for financial planning while doing the retirement planning especially at the withdrawal stage.

Now let’s take up some of the miscellaneous approaches for time value

First is **rule of 72**

If Mr. earns 12% rate of return, within how many years his money will get doubles

Equation: 72/r

Where r= rate of interest

Answer: 72/0.12 = 6 years

Second is **rule of 69**

Equation: 0.35 + (69/r)

If we find the doubling period using previous question, the same will be

Answer: 0.35 + (69/.12) = 6.1 years.

Rule of 72 and 69 both are the approximation methods however rule of 69 gives better approximation.

**Important:** Both the methods assume compound interest.