Using the rule of 72 to get wealthy
Written by R. A. Stewart
Do you know how long it takes for your money to double using the rule of 72?
Using the 72 formula it works like this:
Simply divide 72 by the interest you are receiving on your money. Of course the calculation does not include the tax paid on your investment.
Another name for the rule of 72 is compounding interest or dividends as is the case when investing in the share markets. You are receiving an income from your original investment plus from the dividends and interest which are left untouched.
This is called compound interest.
There may be a temptation to hasten the doubling up period by searching for high interest investments. My advice is to be careful because if a finance company is paying it’s depositor’s higher than normal interest rates it only means that they are charging their borrowers higher interest rates than the banks. The reason why someone would pay higher interest rates is because they couldn’t get a bank loan because they are considered risky borrowers.
Several finance companies went belly up during the Global Financial Crisis of 2007/2008. These were companies paying higher interest to their investors than market rates.
I did lose money on some of these companies. On reflection, instead of letting the interest compound I should have taken them and invested the interest into my Kiwisaver account.
The rule of 72 is just as applicable to investing in the share market. Your investment can grow using the same principle in managed funds or mutual funds as they are also called but profits can vary.
You can calculate how much your investment needs to grow per annum in order to double within a specified time.
72 / your time frame (years)
If you want your money to double in 10 years then you would need an average annual return of 7.2%
The important factor is time. Young people have that in their favour.
Someone on the verge of retirement is not going to make plans for what they are going to do in thirty years time. Your age is an important consideration to where and what you invest in.
The rule of 72 also works for borrowers. You can work out how long it will take for your debt to grow with this simple formula: 72 / interest rate so if you are paying 15 percent interest rate the amount you owe will double in 4.8 years.
That is of course assuming that you have done nothing to pay off the debt.
It underlines the importance of paying off debt as quickly as possible.
About this article
This article is of the opinion of the writer and may not be applicable to your personal circumstances therefore discretion is advised. You are welcome to use this article as content for your blog or website.
I may receive a small commission if you sign up for Sharesies or Coinbase.
www.robertastewart.com
