• fabianlau

Rule of 72

Updated: Apr 8, 2020


You probably would have heard of this term "Rule of 72" from me or read it from some financial planning articles.

I assure you it is nothing complicated.

Rule of 72 is basically a simplified way to determine how long (in years) an investment will take to double, given a fixed annual rate of interest. By taking 72 divide by the annual rate of interest, it gives you a rough estimate of how many years it will take for the initial investment to double.

For example: the rule of 72 states that $10 invested at 5% would take about 14.4 years [72/5 = 14.4] to turn into $20.

While the more precise mathematical method is by using logarithm calculation, which in most cases with the aid of a financial calculator, the Rule of 72 is an easier way to calculate by doing some mental sums in your head and is fairly accurate.

 

72 divided by 5% = 14.4 years

 

Occasionally, I receive this casual question from friends: "Fab, I want to retire young, how can you help me turn my $100 into $1 million within the shortest time?"

If you have that same question in your mind, here's good news, I have a solution.

Take your SGD100 to a money changer and the man can give you 1,000,000 IDR, how about that? Or a casino might work if you are in luck that day.

There's no quick way to be rich, you just have to do your sums and know which financial instruments to adopt that suits your time horizon.

Clearly, money sitting in your bank savings account today that earns you 1% interest will take you 72 years to double it. I am sure most of us do not have that patience to wait 72 years before you can enjoy your fruits. Wealth management is about identifying your time horizon and allocating your resources into different financial instruments of different risk and returns. Choose an instrument that can fetch a decent interest returns at a reasonable risk exposure.

I love this quote "The biggest risk is not taking any risk" - Mark Zuckerberg, Facebook CEO.


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