Saving money during our working years will help finance our existence when we are no longer working. Whether it will be a meager existence or a great one will depend on how much money we save today (unless we win the lottery or inherit a great fortune). How long will it take to double that money saved? What rate of return (interest) should we be looking for to double that money in say, 5, 10 or 15 years? Let’s find out by doing a handy and simple calculation using the Rule of 72:
Supposing you invest $1,000 today at 3 per cent interest per annum. Divide 72 by 3 and it will give you 24, the number of years it will take to double the $1,000 (ouch!). Another example: invest $10,000 at 8 per cent interest per annum today. Divide 72 by 8 and it will give you 9 years waiting time (better?).
Another side of the equation is: If you want to double your $1,000 in say, 3 years and you want to know the rate of return to achieve this goal, simply divide 72 by 3, and it will give you 24 per cent that you should be looking for. Another example: invest $5,000 and double it in 4 years. Divide 72 by 4 and you are looking at an 18 per cent rate of return.
The Rule of 72 gives a fairly accurate result assuming that the interest is compounded annually and the rate of return is constant. Even an additional 1 per cent yield goes a long way and would be worth negotiating with the bank, especially if you are a preferred customer. The Rule however may not give a not so accurate picture as the rate of return increases above 20 per cent, but let’s not sweat this stuff for now, as high yields of this magnitude are rare. If you find one, don’t just jump on it, be an informed investor first. Income from a successful business is of course another story.
Quote for today:
"Take care of the pence, and the pounds will take care of themselves."
- William Lowndes
Supposing you invest $1,000 today at 3 per cent interest per annum. Divide 72 by 3 and it will give you 24, the number of years it will take to double the $1,000 (ouch!). Another example: invest $10,000 at 8 per cent interest per annum today. Divide 72 by 8 and it will give you 9 years waiting time (better?).
Another side of the equation is: If you want to double your $1,000 in say, 3 years and you want to know the rate of return to achieve this goal, simply divide 72 by 3, and it will give you 24 per cent that you should be looking for. Another example: invest $5,000 and double it in 4 years. Divide 72 by 4 and you are looking at an 18 per cent rate of return.
The Rule of 72 gives a fairly accurate result assuming that the interest is compounded annually and the rate of return is constant. Even an additional 1 per cent yield goes a long way and would be worth negotiating with the bank, especially if you are a preferred customer. The Rule however may not give a not so accurate picture as the rate of return increases above 20 per cent, but let’s not sweat this stuff for now, as high yields of this magnitude are rare. If you find one, don’t just jump on it, be an informed investor first. Income from a successful business is of course another story.
Quote for today:
"Take care of the pence, and the pounds will take care of themselves."
- William Lowndes
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