The Rule Of 72

Posted by : foongpc | Sunday, August 17, 2008 | Published in

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Do you know what is The Rule Of 72?

In finance, the rule of 72 is a method to estimate your investment’s doubling time. The rule of 72 states that if you take 72 and divide it by the annual percentage returns, it will give you the number of years your investment would double.

For example, if you invest RM10,000 at a 4% annual interest rate, it will take 18 years for your investment to double to RM20,000.

72 divide by 4 equals 18

Most banks in Malaysia currently pay up to 4% interest for money placed in Fixed Deposits.

Now you know how long the money in your Fixed Deposit will double in amount!

18 years is a long time, isn’t it? Don’t you wish you can double your money faster? You can! Just place your money in investments that give higher interest rates, like in unit trusts, for example.

The rule of 72 can also be applied to calculate the time taken for the value of your money to be reduced to half. Just take 72 and divide it by the inflation rate.

For example, if the inflation rate is 4%, the RM10,000 that you have today will be worth only RM5,000 in 18 years time.

Again, it is 72 divide by 4 equals 18

Now, you will no doubt notice that if you keep your RM10,000 in the Fixed Deposit account in the bank today, in 18 years time, the amount will double to RM20,000. However, in the same number of years, the inflation will see to it that your RM20,000 is halved to RM10,000 in value.

In other words, your money did not really double! What a bummer!

What’s worse, the Government recently announced that the Malaysian inflation rate is at 7% !! With the rise in petrol price and just about everything else, your personal inflation rate may be even higher than 7%!

Using the rule of 72, your RM10,000 in the example above will be reduced to RM5,000 in value in the short span of about 10 years!!

72 divide by 7 equals 10.2

Is there any point then, in putting your money in the Fixed Deposit? Your money is losing value even as it sits there!

So how do we ensure that the value of our money grows at a higher rate than the inflation rate? The answer is to invest your money with an investment rate that is higher than the inflation rate.

Looking at the current high inflation rate of 7%, you will need to invest your money in things like unit trusts for example, that can give you annual returns that is higher than 7%.

(8) Comments

  1. HEALTH NUT WANNABEE MOM said...

    wow~ How do you know this stuff! Thanks for the information. I am going to pass this on to my husband. Brilliant!

    August 17, 2008 at 2:02 PM
  2. day-dreamer said...

    Hmm... why 72 leh?

    August 17, 2008 at 6:33 PM
  3. Anonymous

    Never mind! Just save as much as one can! Otherwise, there will come a day when one finds one has nothing. Something is better than nothing! - suituapui

    August 17, 2008 at 9:06 PM
  4. I'm Choonie. said...

    You are definitely right. Having so much cash in the bank is useless. But buying unit trust is also a risk. Well... life is full of risk. One just has to make the right choice.
    Oh yes.. about the rate of inflation, you are right again. It should be more than 7%. The garmen is trying to keep us in the dark.

    August 17, 2008 at 10:12 PM
  5. Falcon said...

    i'm confused...lol

    August 17, 2008 at 11:23 PM
  6. Bengbeng said...

    one just has to take risks i suppose but within certain limits of coz

    August 17, 2008 at 11:29 PM
  7. Happysurfer said...

    I feel unit trust is good when the share market is up otherwise one's investment may be eroded, will it not? Please enlighten.

    August 18, 2008 at 2:31 PM
  8. foongpc said...

    health nut wannabee mom, thanks! I learnt it from books!

    day-dreamer, i have no idea. It's just a formula created by a genius.

    suituapui, yes, save! But don't put all in the bank!

    choonie, if the current inflation continues, we'll be in trouble!
    Yes, life is full of risk - we need to take calculated risks.

    falcon, i'm sure you are just kidding me, like you always do : )

    bengbeng, yes you are right, it's called calculated risk.

    happysurfer, yes you can lose in unit trusts too - it's not free from risk, but if you keep longer you can see the risk lowers, So unit trust is for long term, not short.

    August 18, 2008 at 5:50 PM