Have you ever wondered how to know how long will your investment double in value?
Or at what rate should you invest it in so it can double after a period of time?
I will share with you an “investment hack” so can compute easily and mentally the questions above.
The Magic of 72
The Rule of 72 states that if you divide a 72 by a number, you get the following:
- The number of years your investment will double, or
- The rate of return you should be looking for in order to double your investment in a period of time.
How Long Will It Double?
If you are given an interest return and assuming it is fixed, you just need to divide 72 by that return (take out the percentage) and that is how long for your investment to double.
So for example, if you are investing in a fund with an assumption that it will earn 10% every year, in order to get how long will your money will double is as follow:
72/10 = 7.2years
Meaning, if you invest P1 Million today at a fund that earns 10% per annum, it will be P2 Million after 7.2 years.
If you use a Financial Calculator or NPER Function in Microsoft Excel, the answer is 7.27254089734171.
Great Hack isn’t it?
At What Rate Should I Invest In?
Let’s say you want to double your money in 10 years, at what rate should be your annual investment return?
To solve, you divide 72 by 10 (add % after) and you get 7.2%:
72 / 10 = 7.2
Hence, you should looking at a fund that earns at least 7.2% annually in order to double you money in 10 years.
If you use a Financial Calculator or RATE Function in Microsoft Excel, the answer is 7.1773%.
Advantages and Disadvantages
The Rule of 72 is advantageous in helping you decide quickly between two financial instruments to invest in.
It also helps you give a rough estimate on how how long you should invest or how much return should you be seeking for.
This is very helpful in planning for college funding, grand vacation, house/car fund, or even retirement funding.
The disadvantage is that it is just an estimate and the projection is based on the assumption that the rate of return is FIXED Annually. But in the real world, investments move volatile: they go up and down.
If you are still “Investing” in the Bank’s Savings Account…
If you still believe that your savings in the bank is enough, think again!
The interest rate that the banks provide is less than 1%.
Assuming that it is fixed at 1%, if you have P100,000 in the bank at age 20.
At what age will your P100,000 double?
Applying the Rule of 72, the answer is 72 / 1% = 72 years.
Hence, your P100,000 will be P200,000 when you are already 92y.o.
Think again! It’s time to invest in other financial instruments!
Your Millennial Wealth Planner,
Harold Q. Gardon, CWP, CEPP
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