Have you ever been pitched an investment product with promises of doubling your investment in 10 or 20 years? These investment consultants can sound incredibly charismatic and convincing, making their product seem like the most beneficial investment in the world. But how can you truly evaluate whether the return on investment is indeed good or not?
Today, we will uncover a simple trick that will allow you to decipher the value of an investment return – the Rule of 72.
Let's consider a scenario. If you were to invest RM10,000 in a fixed deposit account with a 4% interest rate, how long do you think it would take for your initial investment to double and become RM20,000?
The answer is surprisingly simple if you use the Rule of 72. This principle is an effective way to calculate how long it will take for you to double your money based on a compounding return.
What Is The Rule of 72?
It's an easy mathematical equation:
Using this formula, if the return is 4%, 72 divided by 4 equals 18 years. Therefore, if you invest RM10,000 in an investment that offers a 4% return per annum, it will take you 18 years to double your investment to RM20,000.
With a 7% return, 72 divided by 7 equals approximately 10.28 years. Hence, a RM10,000 investment at a 7% annual return will take just over 10 years to become RM20,000.
By understanding the Rule of 72, you now hold the key to quickly determine the time it will take to double your investment.
Benefits of The Rule of 72
This simple rule can be beneficial in your everyday life. Imagine you're introduced to a promising investment opportunity. They guarantee that your RM10,000 will double in 20 years. It might sound appealing, especially when the advisor is exceptionally persuasive. But what is the actual return you're getting?
Using the Rule of 72, you can quickly find out that the annual compounding return from this product is only 3.6% per annum. Knowing this, you might start comparing this product to other similar return investments such as bonds or fixed deposits. By asking the right questions, you can then discern whether the product is truly suitable for your financial goals.
Although the Rule of 72 is a handy tool for quick calculations, making investment decisions should always involve more in-depth study and analysis. But when you need swift answers to questions like: how long it will take to double your investment; or what the compounding annual return is, the Rule of 72 is an excellent tool to have at your disposal.
Incorporating the Rule of 72 into your investment decision-making process will not only help you make better informed decisions, but it also might make you look pretty smart, too. So, will you use the Rule of 72 in your investment journey?