Rule of 72

Some of you guys may have heard of this rule.
I'll just share it here to those who do not know anything about it.

Rule of 72
# Years to double your money = 72 / (Interest rate in %)
Note that
(1) annual compounding is considered.
(2) the result is a close approximation (Miss Cabbage said that Rule of 69 actually yield a closer result, but is seldom used because it is not a friendly number)

Anyway, here's examples of how you apply it.

Say you invest in some scheme in the market that gives you a 3% return annually.
And you put a one-off $10k in this scheme at the age of 25.
To double this amount of money, you need approximately 72 / 3 = 24 years.

Age 25 --> $10k
Age 49 --> $20k (24 years later)
Age 73 --> $40k (another 24 years later)
Age 97 --> $80k (and another 24 years later)

Notice how your money grows exponentially?
Thats the power of compunding (aka leveraging).

Friends have asked me why I am delaying my house plans for 5 years.
This is the reason why.
(1) I believe presuming that I will save faster than house price increases.
(2) Assuming everything constant, the earlier you buy from the bank, the more you borrow from the bank, the more likely you will take a longer time to repay. If you take 20-30 years to return your loans, you will have paid more than double of what you have borrowed.
But if I borrow 5 years later, I am only planning a 10 year loan due to a lower amount borrowed. The money "saved" can be channeled to annual holidays and investments.

See if this Rule of 72 will be useful to you in any way to your long-term financial planning.


For the more mathematically inclined, you can explore more by clicking here.

Have fun making money work for you.