It Pays To Know The Rule of 72
Have you ever thought to yourself, "Paano ko ba papalaguin ang pera ko?", or “How do I grow my money -- without becoming a victim of scams and of course without having to wait for eternity?” Let me share with you one of the secrets of the wealthy. We call it: the rule of 72. I tell you, numbers and math have never been this exciting!
The Rule of 72: The Secret of The Truly Rich
I first heard about this concept during a Financial Literacy Class that I attended sponsored by IMG back in 2008. Before I explain to you how it works, here's the definition by Investopedia:
"The 'Rule of 72' is a simplified way to determine how long an investment will take to double, given a fixed annual rate of interest. By dividing 72 by the annual rate of return, investors can get a rough estimate of how many years it will take for the initial investment to duplicate itself."
I’ll illustrate this in a bit, but first let's take a look at the current interest rates:
Savings account: 0.25% ~ 0.2% (less tax)
Time Deposit: 1.00%
Given these interest rates, how long do you think will it take to double your money? Time to use some magic! All you need to do is to divide the number 72 by the interest rate to get the number of years it will take for your money to double. Have a look at the the figures below.
CONGRATULATIONS! If you have P1M today, after 360 years, *THREEHUNDREDFREAKINGYEARS* it'll become P2M. 😫😭
Nakakaiyak diba? Can you just imagine? Buhay ka pa ba noon? I remember during a class that I've conducted not so long ago, one of the attendees exclaimed "OMG!" out of disbelief. Oh my goodness talaga. How I wish this is all just a bad joke but it isn't. The sad truth is, majority of the population just leave their hard-earned money in their Savings Account or a Time Deposit to rot as inflation eats up its value. If that includes you, guess what! I'm sorry to say but you will no longer witness the day your money doubles (unless you have a magical anti-aging potion). Don't get me wrong, I have my own Savings Account too but I only use it for my emergency fund and my day to day allowance, but not as my retirement/investment fund. SAYAAAAAAAANG!
Now, let me illustrate to you a different scenario. What if you put your money in investment instruments like Mutual Funds? At an average, Mutual Fund Investments, Equity Funds in particular, yield an annual compounded return of 10% - 12%. Let's apply the rule of 72 to those figures:
fWhoa! From 360 years to 6 years! What if you have Php100,000 now? In 6 years, that could become Php200,000. In another 6 years, it becomes Php400,000. How many sets of 6 years do you have compared to 360 years? This is the main reason why I encourage people to start early. The earlier you start investing correctly, the more time you have to double your money. Isn't that amazing? BUT, as amazing as this looks, it’s also appalling if you don't do something about it.
So, what are you waiting for? Learn more about the Rule of 72 and other important personal finance secrets by watching my webinar for free.
See you soon!
About the Author
Chai Santiago is a graduate of Manufacturing Engineering and Management from De La Salle University who later on found her passion and purpose in the Financial Education industry. She is a Certified Financial Educator® (CFEd®) under Heartland Institute of Financial Education (HIFE) and a Financial Coach at International Marketing Group (IMG).