Rule of 72

Double your money in 5 years.  

Is that possible?  

Of course it is possible.  

A couple of years back there were banks offering such a product.   

If you are wondering what rate the bank is giving you so that you can double your money in five years, the Rule of 72 is the only thing you have to remember.  

The Rule of 72 states that to determine the number of years it will take for your investment (or for your debt) to double in value, simply divide the number 72 by the percentage rate you are earning on your investment (or paying on your debt).

For example,  you have a time deposit which gives you 4% per annum.  How long will it take for your P10,000 to become P20,000?  Based on the Rule of 72, it would take 72/4 or 18 years for that P10,000 to become P20,000.

If you think that's long, think about the P10,000 in your savings account earning less than 1%. Even MyGirl can tell you that 72 divided by 1 is 72.  Yes, that's 72 long years before your P10,000 becomes P20,000 if you leave it sleeping in your savings account.

Naturally, you'd want to put your money some place better.  If you found a higher yielding instrument, say something at 8%, you'd want to put your money there.  See 72 divided by 8 is 9. This means that in nine years, your P10,000 becomes P20,000; and in 18 years, your P20,000 becomes P40,000.  Not bad if you can find that 8% yield.

(Even better of course is something at 12%.  At 12%, 72 divided by 12 is 6.  In six years, that P10,000 could be P20,000; in 12 years it would be P40,000; and in 18 years it would be P80,000.  WOW!!!!)

The number 72 is a convenient rough estimate for this calculation because 1, 2, 3, 4, 6, 8, 9, and 12 are all factors of 72.   It makes the calculations a little bit easier.

 

As mentioned, the Rule of 72 works for your assets, as well as for your liabilities.   

Think of your credit card bills.  Any unpaid balance is usually charged 3% per month. Take note, PER MONTH.  3% per month is 36% per annum.  (Certainly a far cry from the 4% per annum TD rate and the less than 1% savings rates!)

So before you consider NOT paying your P10,000 credit card bill, think about the Rule of 72.  According to this rule, divide the number 72 by the percentage rate to determine the number of years it would take for the investment, in this case, the debt, to double.  

72 divided by 36 is 2.  This means, that in two (that's right, 2) years time, your debt of P10,000 will become P20,000.  And if you insist on NOT paying your bill, in 4 years time, that once upon a time P10,000 credit card bill will become P40,000.  

Remember that it would have taken you 18 years to make that P10,000 time deposit at 4% to double?  Well, if you wait 18 years to pay that P10,000 credit card bill, at 3 % per month, you would be P5,120,000 in debt in 18 years.   

(That is definitely not a joke.  It is important to pay your credit card bills in full if you want to stay out of debt because those credit card companies thrive on interest payments.)

Here is a table showing that Rule of 72 over time given different rates.  Remember that the rate can be a rate you are receiving or a rate you are paying.  Either way, the Rule of 72 applies.

Rule of 72	36%	12%	8%	1%
--> YEARS	2	6	9	18
1	10,000	10,000	10,000	10,000
2	20,000
4	40,000
6	80,000	20,000
8	160,000
9			20,000
10	320,000
12	640,000	40,000
14	1,280,000
16	2,560,000
18	5,120,000	80,000	40,000	20,000

Hope that puts things into perspective for everyone.

As a final note, for those who are too tired to pick up a calculator, the rate to double your money in five years is 14.4%, which is 72 divided by 5.

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