Rule 72: An Extension

I have found a better explanation on Rule 72. This approximation technique is useful in many other ways.It is not only used to find out how long it takes for your money to double. I copied this article from Malaysian Investor Website.

Rule of 72 – Time to Double Your Money…. or Debt? This article gives a quick rule of thumb to calculate how fast your investments can grow. If you put RM1,000 in a fixed deposit s today and earn a 3% return per annum, do you know how long does it takes to double your money? Before you rush off for a calculator, let us tell you, it is 24 years. How d id o we get that number in a matter of second s ? S imply , by dividing just 72 by 3 (the interest rate). Yes, 24 years is the time it takes for RM1,000 to double to RM2,000 (assuming that no further deposits are added in that time).

Rule of 72

The “Rule of 72” is a rule of thumb that can help investors compute the time it takes for their money to double, given an interest rate or return, and if they do not add in any money in that time. It is called the Rule of 72 because at 10%, the money will double every 7.2 years. However, like any rule of thumb, this rule is only good for approximations.

What else can it be used for?

To find the rate of return required to make your investment portfolio double
Divide 72 by the number of years you want your money to double. For instance, if you want your money to double in 10 years, thus you will need a consistent 7.2% return from your investment annually.

Calculation:	72/X years = Y (% of return)
	72/10 years = 7.2% return

To find out how fast your debts can double, especially with high interest rates
If you borrow RM10,000 at 12% interest rate s , thus it would take s six years for your debt to double to RM20,000, if you do not make any payments. So pay your credit card debt now!

Calculation:	72/Y % (interest rates) = X years
	72/12 % = 6 years

To show how inflation rate can halve your buying power
For those that who still favour putting your savings under the mattress, this rule will show how inflation rate can halve your money. For instance, if the inflation rate is approximately 2%, your money would only be worth half of of its original value in 36 years. So if you have RM1,000 today, it will only be worth RM500 in 36 years time. This is, of course, assuming the inflation rate remains the same throughout the period.

Calculation:	72/ W % ( inflation rate )
	72/2 % (inflation rate) = 36 years

Among its drawbacks

• One of the disadvantages of this calculation is that it does not take into account any additional money that you can or will invest over the years.
• The rule assumes that your investments are tax-deferred and earn ing compound interest.
• The rule is applicable for approximation only and not for real accura te cy calculations .

The Rule of 72 is a quick tool to predict how fast your money or debt will grow, how much returns you will need to earn to achieve your financial goal and how inflation can affect your savings.

* Please note that the rate of return, inflation and interest rates in this article are for illustration purposes only and does are not meant to represent any specific investment or imply any guaranteed rate of return etc. Investor s must remember that the value of actual investments may fluctuate.