Rule of 72 – Time to Double Your Money…. or Debt?

Published by slang January 25th, 2007 in Personal Finance

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Are you familiar with the Rule of 72?

This article seeks to familiarise ourselves with this simple but yet useful tool whereby we can approximately predict how fast our money or debt will grow, how much returns we will need to earn to achieve our financial goal and how inflation can affect our savings.

Incidentally, it being called the Rule of 72 because at 10%, the money will double every 7.2 years. (PS: this rule is only good for approximations.)

The following illustrates the many applications in using the Rule of 72:

1. To help us to compute the time it takes for our money to double, given an interest rate or return, and if we do not add in any money in that time.

For example:-
If we put RM1,000 in a fixed deposit s today and earn a 3% return per annum, do we know how long does it takes to double our money?
Using the Rule of 72, simply, by just dividing 72 by 3 (the interest rate) which is equal to 24 years.
Hence, it takes 24 years for RM1,000 to double to RM2,000 (assuming that no further deposits are added in that time).

2.To find the rate of return required to make our investment portfolio double

Divide 72 by the number of years we want our money to double.
For instance, if we want our money to double in 10 years, thus we will need a consistent 7.2% return from our investment annually.
Answer: 72/X years = Y (% of return)
72/10 years = 7.2% return

3. To find out how fast our debts can double, especially with high interest rates

If we borrow RM10,000 at 12% interest rates , thus it would takes six years for our debt to double to RM20,000, if we do not make any payments!!!
Answer: 72/Y % (interest rates) = X years
72/12 % = 6 years

4. To show how inflation rate can halve our buying power

If we still favour putting our savings under the mattress/idling, this rule will show how inflation rate can halve your money.
For instance, if the inflation rate is approximately 2%, our money would only be worth half of of its original value in 36 years.
So if we 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.
Answer: 72/ W % ( inflation rate )
72/2 % (inflation rate) = 36 years

Like any other mathematical tools, it also has its drawbacks/limitations which includes:

it does not take into account any additional money that we can or will invest over the years.
The rule assumes that our investments are tax-deferred and earning compound interest.
The rule is applicable for approximation only and not for real accurate calculation .

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