The Rule of 72

Do you know how long it may take for your investments to double in value? The Rule of 72 is a quick way to figure it out. The rule of 72 is the most important lesson on investing that I ever learnt. What does this means?

It just simply mean that if it take 72 divided by annual return you are getting from any investment instrument. Then it will come out the number of years it to double your money.

For example, used Fixed Deposit as an example, the current 12 months Fixed Deposit Rate say is 4%. Then 72/4 = 18. It means that you need 18 years to double your money with 4%.

If you are savvy investor and you are able to make 12% per year, then 72/12=6 years. You will just need 6 years to double you money!

If you think this is still not good enough and we only can reference to Warren Buffett which his annual return is about 21%.

Buffett's biggest claim to fame is the track record of strong returns that he's put together at Berkshire Hathaway. Over a history that spans more than 50 years, Buffett has more than doubled the overall stock market's return, producing average annual gains of nearly 21% compared to the S&P 500's 10%.
With this return, 72/21 = 3.4 years

For example, you have RM50,000 and with annual return of 21%, your money will grow to RM100,000 in 3.4 years.

Vice versa, The Rule of 72 can also be used to estimate the interest rate necessary to double the value of an investment in a particular number of years. For example, to double an investment in 6 years requires an interest rate of about 72/6 = 12 %.

Why is this important?
A lot of people wanted to become millionaire, but how? Through saving? Through business? through employment? Everyone become a millionaire has to start from somewhere. Refer to the tabulation below.

This table just an illustration if you have RM1,000 and you double it every time, you will become Millionaire after 10th double. After understand this table, what is in your mind?

The chances of you having RM1,000 saving in your bank is high now. If you are working adult, or colleague student, RM1,000 is an easy job. If you do not have it, you can easily earn this in 2 to 3 months by just doing a GRAB driver!

For those working adult, you do not need to have 10th times to double your money, chance that you are having saving of RM16,000 or RM32,000 if you are working adult for sometime. So you are only 5 times away to become a millionaire. If you do not have that amount after working for few years, then I will say that you do not have investment problem but money management problems. Make sense? I will not go into this for this article here.

Let's focus on the rule of 72 here now. From RM1,000 to RM32,000 is very easy to reach. You do not need any investment vehicle to do that. You can work hard, work extra hours, work 2-3 jobs a day etc in order to save that amount of money.

However, if you want to grow your money from RM32,000 to RM1,000,000 it is very tough and the only way to reach there is through investing. From RM32,000 to RM1,000,000, you only needs five doubles to reach millionaire.

For those who have saving of RM128,000, you only requires three double to become millionaire! Do you get the idea of the table? Look at the table again and check your bank account now, how far is it for you to become millionaire?

Now the next table I will put in the annual return rate to see how will it turn out to be?

 Okay, let's go down to the reality, if you are having RM128,000 in your bank now with FD of 4%, you will need 3 times of double to reach million dollar. Each double going to take you 18 years. That means 18 years x 3 = 54 years! Do you have time to enjoy your million dollar by then? You better have a better return rate to work for you. My guess is at least 12%. So that three double will take you only 18 years to become millionaire.

How do we sum up here?
We know that we are about three to five double away to become a millionaire. Then the annual return you get is important factor to reach your million dollar goal. Do you get this interesting concept?

Start investing as early as possible with decent annual return today.