"Albert Einstein called compound interest, the eight wonder of the world and mankind's greatest invention, because it is the mightiest force ever unleashed for the amassing of wealth".
Compound interest is surely an amazing thing ...
and the Rule of 72 is just a simple way to quickly estimate how long it
will take for your money or investment to double.Take note, that its
just an estimate, as there are other factors to consider like investment
performance, the risk involved, the charges associated with individual
investments, yearly investment fluctuations, and taxes.
Here's a chart to illustrate: Money left alone in long term investment will compound indefinitely as years pass. You can estimate how much it will be with the aid of the "Rule of 72".
*courtesy of IMG.
How To Use the Rule of 72
In order to estimate the number of years for your money to double, just divide 72 by the interest rate. The result is the number of years in which your money will double with
that particular rate. Looking at the chart, we assumed a person at age 29 investing P100,000 in 3 different investment vehicles. In the 1st column, the rate of interest is at 4% (which is more or less given by banks for time deposits, some years back, as now its much lower). So, with 4% interest rate, his money doubles every 18 years. Thus, if he retires at the age of 65, his money will double two times and finally getting P400,000 by retirement age. In the 2nd column, the interest rate is a bit higher at 8% (most likely possible if invested on bonds). By the rule of 72, his money doubles every 9 years, and thus, having P1,600,000 when he retires, that is, it doubled 4 times. And lastly, on the 3rd column, he invested it at 12% (highly possible if invested in equities or the stock market). At 12%, his money will double every 6 years. Thereby, doubling it 6 times before he gets to retirement, and thus having P6,400,000 at age 65. Simply put, if you placed your P100,000 in a bank, then at age 65, you only get your P400,000 while your bank gets the P6,000,000 difference as the bank knows where to invest your money.
that particular rate. Looking at the chart, we assumed a person at age 29 investing P100,000 in 3 different investment vehicles. In the 1st column, the rate of interest is at 4% (which is more or less given by banks for time deposits, some years back, as now its much lower). So, with 4% interest rate, his money doubles every 18 years. Thus, if he retires at the age of 65, his money will double two times and finally getting P400,000 by retirement age. In the 2nd column, the interest rate is a bit higher at 8% (most likely possible if invested on bonds). By the rule of 72, his money doubles every 9 years, and thus, having P1,600,000 when he retires, that is, it doubled 4 times. And lastly, on the 3rd column, he invested it at 12% (highly possible if invested in equities or the stock market). At 12%, his money will double every 6 years. Thereby, doubling it 6 times before he gets to retirement, and thus having P6,400,000 at age 65. Simply put, if you placed your P100,000 in a bank, then at age 65, you only get your P400,000 while your bank gets the P6,000,000 difference as the bank knows where to invest your money.
Here are some interest rates and the corresponding amount of time for it to double:
1% - 72 years
2% - 36 years
3% - 24 years
4% - 18 years
5% - 14 years
6% - 12 years
7% - 10.3 years
8% - 9.0 years
9% - 8.0 years
10% - 7.2 years
11% - 6.5 years
12% - 6.0 years
2% - 36 years
3% - 24 years
4% - 18 years
5% - 14 years
6% - 12 years
7% - 10.3 years
8% - 9.0 years
9% - 8.0 years
10% - 7.2 years
11% - 6.5 years
12% - 6.0 years
Remember, that this is just an estimate as I have mentioned earlier. The rule of 72 is also helpful if you want to compare the rate of growth between two investments with different interest rates. And it can also show us the power of inflation or how much will things cost in the future. For example, at 5% inflation, your monthly food budget of P10,000 will double every 14 years. So in the year 2025, you will need P20,000 to buy the same amount of food today.
So again, we remind you that your investment should take into consideration the rate of interest, rate of inflation, and the taxes imposed on it ... as you let time take it's toll .... and enjoy the power of compounding. Happy investing in the right vehicle!
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