Category: Money Tips
Created on Friday, 18 June 2010 10:44
Written by Samuel Goh Nai De
The Rule of 72 is an important rule of thumb in financial planning that can help an individual to calculate how fast his investments may grow and double in value. In other words, simply insert any rate of return, and it will determine how many years it will take for the individual’s money to double in value.
This rule allows the investor to quickly and efficiently answer two questions:
1. How long will it take me to double my money if I earn X% of return per annum?
2. What is the rate of return that I must earn if I wish to double my money in X years?
The only piece of information you need for this calculation is the annual rate of return. As most investments do not have a fixed rate of return over a long period of time, one can use an average estimate to get a pretty good idea in executing the Rule of 72. How to Use the Rule of 72?
To assess how long it takes for your money to double, simply divide 72 by the interest rate. The result is how many years it will take for your money to double at that rate. For example, let’s assume you can earn an 8% rate of return. How long will it take $2,000 to grow into $4,000?
72÷8 percent = 9 years
In this case, suppose you invested $2,000 into an account that earned a flat 8% annual rate of return, after 9 years, your investment would be worth around $4,000. Remember, It’s Just an Estimate
An important point to note is that this is just a quick and approximate estimate. The actual amount of time needed to double your money will vary depending on the following determinants:
- Changes in the rate of return over time
- What you’re invested in – Investment Products
- How you invest it
- How interest is applied – Annual, semi-annual etc
- Tax implications – Capital gains taxable
The Rule of 72 is especially helpful when an individual wants to compare the rate of growth of two investments at a quick glance. At the same time, this rule also provides insightful information with regards to understanding the power of inflation. For instance, if you consider the average long-term rate of inflation is between two and three percent, something that is worth $1000 today will cost $2000 in about 18 to 20 years. What this means is that one cannot neglect the power of inflation and the importance of achieving a rate of return over time that can not only overcome inflation, but also taxes. About the Author:
. Disclaimer: The views expressed in this article reflect the personal views of the writer. The information provided herein is general in nature and does not have regard to the specific investment objectives, financial situation or the particular needs of any person. Wisdom Capital LLP and its affiliates, directors, associates, connected parties, employees and/or representatives may own or have an interest in the securities covered in this article. This article shall not be construed as an offer or solicitation to buy, sell or subscribe for any investment product or the giving of advice thereof. Please seek advice from a financial adviser regarding the suitability of the investment product, taking into account the specific investment objectives, financial situation or particular needs of any person in receipt of the recommendation, before the person makes a commitment to purchase the investment product.