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The Rule of 72: The Classic Computation every Investor Must Know

April 6, 2015

One of the financial computation that I find hard to understand is the idea of Rule of 72. I first encountered the concept in other financial blog and I did try to understand it but I failed.


The Rule of 72 shows the future computation of your money. It simplifies how to determine when will your investment doubles with just a given fixed annual rate. The formula is just division. It says that as long as you divide the number 72 to the fixed annual interest rate then you’ll get the number of years that your money (investment) will double. 


The Magic Formula

 72 divided by (Fixed Interest Rate) = The Number of Years that You Money will Double

Example:

I invested 1000pesos in my mutual fund. Now I want to know how many years will my 1000pesos double. Let’s say that the fixed interest rate is 5% thus the formula will be exactly like below:

72 divided by 5 = 14.4 years for my 1000pesos to become 2000pesos.

The Basic Application

Say for example the amount of money that you want to retire with is 2 million pesos. Now the most common annual interest rate for this example will be 4, 8 and 12. If we use the Rule of 72 at the current investment that you have let’s say 100,000pesos and your age now is 25 then we can clear out how harder you need to go in order to retire the way you wanted.

Here are the given:

  • Your age is 25 
  • Your investment is 100,000pesos
  • Your retirement goal is 2 millions pesos
  • Your retirement age is 60-61
  • You interest rate options are 4, 8 and 12

Solving with the Rule of 72:

72 divided by 4 equals 18 (your 100,000pesos will double every 18 years)
72 divided by 8 equals 9   (your 100,000pesos will double every 9 years)
72 divided by 12 equals 6 (your 100,000pesos will double every 6 years)




Result:

Why The Rule of 72 Matters?

Just like what I revealed in the introduction, I first learned about this double your money computation on other financial blogs that I visit almost every day but it was actually when I attended the Series 1 Seminar of IMG Wealth Academy that I realized how powerful Rule of 72 is. 

Here are the reasons why:

1. It can develop a clear picture of where you want to go. 

On the above example you have a clear idea on how many years it will take for you to reach your goal, at what age your goal will be doable and at what investment rate will have much more valuable return.

2. Enables you to become strategic in your investments.

Using the Rule of 72 empowers you to design a program that will outpace inflation. 

3. It helps you choose the savings plan that will work best for your and your budget.

You won’t choose an investment plan for your goal that will take you a lifetime to have an answer. With the help of Rule of 72 you can choose better for your investments.

Now this computation is just to determine how many years will it take for my opening fee to double. This means that your additional investments will have a separate computation. I suggest doing this Rule of 72 every end of the year so that you’ll have an idea as to how many you have currently have and how many years more for it double.

I hope this post helped you. Does knowing the Rule of 72 helped you?!


1.                   FAMI or COL Financial??? (Beginner’s Alert!!!)
2.                  How to Compute for your FAMI Investment
3.                  How to Worry-Free Invest in the Philippines
4.                  Learn to Invest Without Tears Before 2014 Ends
5.                  My 2015 Investment Plans and Nice to Haves
6.                  Things that I realized since my First Investment

7.                  Understanding Managed Funds as an Investment Vehicle in the Philippines

Be better in your finances. Save Now, Invest Now and walk your way to success. Sign up in my Email List and receive templates to get you started in your Financial Wealth. Follow me on Facebook and Twitter for better updates. Godbless

Clariza Glino

Izza of SavingsPinay promotes financial literacy for the young and young at heart by providing insights and tips on budgeting, saving, investing and online entrepreneurship. Aside from this blog she also writes at www.izzaglino.com, a beauty and lifestyle blog for frugal Pinays and manages, www.izzagevents.com, a wedding and event business since 2011. For inquiries, topic suggestions or future collaborations email her at izza@savingspinay.ph

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