In Finance, the Rule of 72 is a method for estimating your investment’s doubling time.
Considering the compounding interest, you can calculate the number of years your money will double in a certain investment. Also, this rule can also be applied in measuring when your money will be halved if used to calculate using the percentage rate of inflation.
Let’s put it into figures so you can better understand. Using this formula, you would only need the percentage of interest you are earning in a year.
Applying the rule, the figures below show that the investment is earning a 4% every year. What you would need is to do this computation: 72 divided by 4 = 18.
Meaning every 18 years your money will double, so if you invested Php 100,000 at age 29 you will earn another Php 100,00 at age 47 and so on. That’s just how simple the computation is. What really matters is you know the percentage return of your investment.
|72 divided by 4|
|Money doubles every 18 years|
Where you put your investment matters, so the higher rate of return the better. Example, you learned about investing in mutual funds which is performing better at 8 to 12% per year. Use the same computation we did earlier. At 12% rate of return per year, you will be doubling your money every 6 years.
|72 divided by 12|
|Money doubles every 6 years|
That is way faster than putting your money in the bank and you are earning it passively. You don’t have to put much effort to earn that. What you would need is to save as much to put there.
You can also do this in estimating when your money will be halved when considering inflation. For example, our current inflation rate is 2%. So 72 divided by 2 = 36. In 36 years, your money will be halved. If you still have that Php 100,000 kept in the bank and grows nothing in interest. It will be worth Php 50,000 in today’s value. So technically, keeping your money in the bank is risky. It must be used for storage of emergency fund and short-term financial goals.
So that’s it, Rule of 72. Hope you learn something that you can apply in planning for your financial goals.
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