Quickly Estimate Your Investment Returns with Rule of 72

Quickly Estimate Your Investment Returns with Rule of 72

What is Rule of 72?

All of us want to be able to quickly calculate something. That’s why we learn the multiplier table when we were young. We also learn mathematics from the early childhood days too. So, numbers are important. Well, what about calculating numbers related to personal finance? Use calculators? Well, make it even simpler. Calculating using the Rule of 72.

Briefly, it helps us with a simplified formula which can immediately gives us an estimation on how long it will take for our Fixed Deposit (FD) in the bank could double (It will take a very long time) or how quickly could our credit card debt doubles (very quickly, actually if we start accumulating). So, this is a super handy way for us to quickly compare between two different type of investments.

Calculating when can our investments double?

We assume our investment return is 6 percent. This is close to what EPF has been giving us as dividends for the past many years. To find out when will our money in EPF doubles, we just use 72 divided by 6 percent. The answer is 12. So, our money inside the EPF will double in 12 years time. RM100,000 will become RM200,000 if we left it untouched for 12 years. Pretty good since there will be 3 times of 12 years in our working life. We start at 24 and we stop at 60. That’s 36 years or 3 times 12 years.

We can also estimate the rate of return using Rule of 72 as well

Let’s say we have RM100,000 today. We want to ensure this RM100,000 will double. We also know that we will need this money to double in 10 years because we want to use the RM200,000 to buy something we like. Or maybe RM200,000 to allow us to take a cruise around the world for one year? We just need to use 72 divided by 10 years and the answer is 7.2 percent. To double our money, find an investment which can give us a return of minimum 7.2 percent and in 10 years, whatever we have will double. Super easy right?

Some other uses of Rule of 72?

If we owe just RM1,000 in credit card debt and it has an interest of 16 percent, this RM1,000 will double within 4.5 years. 72 divided by 16.

If our country has an inflation rate of 3 percent and that bowl of curry noodle is RM10 today, it should be RM20 in 24 years. 72 divided by 3. Just need to remind ourselves that when it coms to food, the increase has never followed inflation. It is usually rising much faster. For example, a RM2.50 cup of teh tarik can become RM2.70 the next year. 20 sen is not a lot of money but in % wise, this is 8 percent!

What are limitations for rule of 72?

Well, rule of 72 provides an approximation and not an exact number. Plus whatever we do, please remember that it assumes everything stays exactly the same as the starting point. So, we cannot use this when there are any changes in the number on year 2 or changes in year 3 etc. For those, maybe a formula in Microsoft Excel will work much better yeah. It also cannot do things such as mortgage repayment calculation etc. For that, you can refer to the article here for all the sites to help you further: Find Accurate Calculators for Finance

Happy applying and getting an answer almost immediately. Then, we can all invest wisely and know which one gives better returns, faster.

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