RULE OF 72

This is a useful tool for investors, businessmen and savers.

Rule of 72 estimates the number of years your money will double given a fixed interest rate. We compute by diving 72 by the interest rate or desired return.

Consider the following example. If you place your money in an investment or certificate of deposit (CD) having an interest rate/return of 4% p.a., that means your money doubles in 18 years. If the rate is 8% then it doubles in 9 years and 6 years when the interest is 12%.

So if you are an investor deciding where to put your money, you will be able to calculate roughly when your money will double. This can guide you estimating the growth of your money.

Typically, people place money in CDs because it appears to be safe. It is covered by deposit insurance and therefore secured. However, armed with knowledge on the Rule of 72 you will see how much your money can grow in a CD. If the inflation overtakes the return on your CD then saving money in your bank is a sure way to lose it. 

Let's say you put your 100,000 on a CD with 4% p.a. interest. On the 18th year it will be 200,000. But can your 200,000 buy the same things you can buy with 100,000 18 years ago? If the answer is NO then you never gained anything at all but lose some of your money. The value of your 200,000 is less than your 100,000 18 years ago. 

We will talk about inflation sometime soon.

Be a wise investor.