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Rule of 72 for Money Management And Financial Planning

Posted on the August 16th, 2008 under Investment, Savings, Retirement by (Beaulife) Altis Lo

For money management and financial planning, Rule of 72 is a golden rule.

Rule of 72 is the most popular financial method to estimate time required to double an investment at a given interest rate, or halve the savings at a given inflation rate.

1. Years to double = 72 divided by Interest Rate (in percentage), e.g. it takes 12 years to double an investment at 6% interest rate.
2. Years to halve = 72 divided by Inflation Rate (in percentage), e.g. it takes 12 years to halve an investment at 6% inflation rate.

It could be very alarming to know the truth below by applying this formula:

1. If you are paying 18% per annum for credit card interests, your outstanding amount will double in 4 years.  (72 / 18 = 4)
2. Estimate the university fee increase by 6% yearly, it takes 12 years to double it. (72 / 6 = 12)

This is exactly how powerful is our compound interest, be it for our investment, savings, housing loan etc.  Therefore, it is very crucial to know where our savings diluted in order to plan ahead for our children’s education in university, and make drastic decision upon reducing the outstanding in credit cards.

Let’s assume that an index mutual fund (or index unit trust fund) has an average return of 10% annually and the parents start an initial investment of M10,000 when the child just born, you may expect the amount doubles in approximately 7 years.  See the illustration below:

Year 01: RM10,000

Year 07: RM20,000

Year 14: RM40,000

Year 21: RM80,000 (this is the year to commence child’s university studies, if not the list will go on…)

Year 28: RM160,000

Year 35: RM320,000

Year 42: RM640,000

Year 49: RM1,280,000 (by 50 years old, your child could become a millionaire, with assumption of no redemption of mutual fund throughout the past 49 years)

Year 56: RM2,560,000

Year 63: RM5,120,000

This illustration is a very systematic approach to save up for our goal (children’s education, retirement or millionaire dream) that gives us a very simple plan to fight against inflation and to achieve our goal.  To plan is to succeed, therefore, all investment must start as early as possible, and no amount is too small to start your investment.

Should you need a proper guidance to plan for your children’s education and retirement, please do not hesitate to email to me for a face-to-face discussion.  I am more than willing to assist you to achieve your dream and goals.

Technorati Tags: Annum, Compound Interest, Drastic Decision, financial planning, Golden Rule, Housing Loan, Inflation Rate, Initial Investment, Investment Savings, Millionaire Dream, Money Management, mutual fund, Redemption, Rm80, rule of 72, S Education, S University, Systematic Approach, unit trust fund, Year 63

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