the rule of 72
Saturday, January 26, 2008 (10:58 AM)
on 21st may last year, there was a publication on the rule of 72 in the newpaper. it's sort of like an investment strategy and i thought it'd be useful to put it here so i can throw the tattered article away and still have a reference somewhere that doesn't clutter up my narrow study desk. here's the first of four parts...
tool #1: how long to double your money?
to answer this question, all you need to know is (i) the interest rate and (ii) "the rule of 72".
it works like this: the number of years it takes to double your money times the interest rate is equal to 72. here are some examples:
(i) first, an easy one: suppose an investment earns 7.2 per cent interest. then it will take 10 years to double your money. why? because 10 years x 7.2% = 72. of course, it is also true that 72 / 7.2% = 10 years.
(ii) another easy one: if you earn 10 per cent per year, it takes 7.2 years to double your money. calculation: 72 / 10% = 7.2 years.
(iii) one more example: you can expect a lot of ups and downs when you invest in the stock market. but over the long run, you can expect to earn about 12 per cent per year from singapore shares.
using our new rule, it means your money in shares will double every six years. calculation: 72 / 12% = six years.
(iv) advanced lesson: you are eligible to take a payout from your cpf retirement account at age 62. but if you put off receiving your retirement payout by one year, until age 63, then after 18 years, you will receive an extra year of payout.
it is another application of the rule of 72. you earn 4 per cent interest in your retirement account. at 4 per cent, you double your money in 18 years (72 / 4%). it gives you an extra year's payout in year 19.