Rule of 72

Albert Einstein once described that the compounding effect of an interest rate is the 9th WONDER OF THE WORLD. He could not be exactly wrong about it!

Let's see how you can apply THE RULE OF 72 in your everyday life.

Assume that you have currently RM 60000 and you need raise it up to RM 120000 in an investment product that gives you 7% return per annum (compounded). Just how long do you think you need to wait to achieve that RM 120000?

To get the solution, you just need to divide 72 by the return rate.

(72/ 7%) = 10.2 years

 Which means, you need to wait 10.2 years to see your capital grow to double the amount.

Let's see another example.

Assume that you presently have RM 5000 cash in hand and your father had asked you to safe it in a fixed income security that generates  3.5% per annum. You aspire to use that money in the next 6 years time to cover the down-payment proceeds of RM 30000 ( You plan to purchase a new residential house in 6 years from now and its down-payment is RM 30000).

By using RULE OF 72 method, (72/3.5%)  =  20.5 years, which means your current money of RM 5000 will be raised to RM 10000 in the next 20.5 years if you follow the advise of your father by investing in an investment product @ 3.5% per annum return.

If you need RM 30000 in 6 years time, you need to currently have RM 15000 at least, and invest in an investment product that can generate a return of 12% a year.

(72/12%)= 6 years 

Under this circumstance, you would probably discard your wish to purchase that dream house of yours unless someone is willing to top up your RM 5000 to RM 15000. Good Luck!

The RULE OF 72 can be used to find the required number of years for a money to double as shown in the first example above. Also, the rule can be used to find the rate of return required to see your money to double, as shown in the second example above.

Remember, this method does not work on a simple interest rate scenario. It only functions when the rate of return is a compounded type.

Please see the table below for further understanding.

RULE OF 72

This simple rule is used to answer the below 2 questions.

1. If i invest now, in how many years do i get to see the value doubled, if the return is 7% per annum?
2. If i want to invest and my holding period is 8 years, what return on investment would i be looking for?

Question No. 1 can be answered by applying the simple Rule of 72.

72 / 7 , and that will give us 10.28 (nearest to 2 decimal points) years.

It means that if you invest in a fund that generates 7% return per annum, your capital ( any amount) injected would grow double in 10.28 years (note: the number could move either way too,i.e. either grow of decline)

Question No.2 also can be solved using Rule of 72.

72/ 8 years ,and that will give us 9% per annum rate of return.

It means that if you want to see your capital  to double (or reduce to halve) in 8 years, you should put all your money in a product that generates 9.00% return per annum.