The Rule of 72 – What?

The simple rule of 72 is crazily easy to understand if you practice it well enough. Here’s a quick explanation of how to use the Rule of 72 in your investment calculations. Beware: It may not be very accurate, but it gives you a good gauge.

The Rule of 72 is a gauge to where you can determine (in approximate values) how long (TIME) an investment can take to double, given a fixed RATE of interest. Taking 72 to divide the RATE, you can get a rough estimate of how many years would it take for the initial investment to do whatever you want to do. For example:

  1. Determine the shift and impact of inflation rates and; plus of interest rate returns.
  2. Determine the influx of ‘monetary value’ to interest rates that will command your ‘value of money’ for your savings to inflation rate in the country.
  3. Determine the interest rate needed to reach your financial goals.
  4. Determine how long will it take (or how much of the interest rate you need) to double your savings.

A good picture of the formula can be seen here:


Ezhibit 1: Rule of 72

Keep in mind that the rule of 72 is only fairly accurate from interest rates of 6% – 10%. Anything above or below can result in a 2.4% – 10.6% error. Keep that error buffer in mind, and also remember that for every 3% after the 8% interest rate you have, take (72 – 1).


To make things simpler for you, you can also use this formula for anything above 6% – 10%.

Exhibit 2: Rule of 72 extended


That’s about all you need to know about Rule of 72. Do not get confused with E-M calculation, Rule of 69 or any other rules. Rule of 72 is unique by itself, and you should only make simple calculations to gauge the number of years taken or interest rates.

If you need to calculate anything more than 10%, always keep in mind that you can use something called the FUTURE VALUE formula. But we’re not going to cover that.

Example:
You have RM100 in the bank, and want to double your money to say RM200 in the next 5 years. So, the rule of 72 applies:

72 / R = 5, therefore,


R = 72 / 5

You get,


R = 14.4%

Interest rate needed to double RM100 to RM200 in the next 5 years.

The mortgage and financial consulting services are offered to you FREE of charge without any obligations. Kindly contact us or email to consultant@malaysialoan.com.my if you need any enquiry. Thank You.

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