What is the rule of 72? How is it related to Financial Planning?
The rule of 72 dictates that to be able to compute the approximate number of years for your money to double, simply divide 72 by the interest rate.
72 / interest rate = approximate no. of years it will take for your money to double.
Let’s take the example of having a Savings Account in any commercial bank with the current prevailing interest rate of 1%.
Say I put a 100k in Metrobank under savings account which gives 1% pa interest. How many years will it take for my money to become 200k? Using the rule of 72, we use
72 / 1% = 72 years for my money to double
So if I’m 29 years old, by the time I reach 101 years old, my money will become approximately P200,000.00. By that time, most likely, I’ll be 6 feet under.
Likewise, if I’ll invest the same money in a mutual fund that gives an average return of 12%, my money will double when I’m 35 years old or in a period of 6 years.
| Rate of Return | Rule of 72 | Actual # of Years | Difference (#) of Years |
| 2% | 36.0 | 35 | 1.0 |
| 3% | 24.0 | 23.45 | 0.6 |
| 5% | 14.4 | 14.21 | 0.2 |
| 7% | 10.3 | 10.24 | 0.0 |
| 9% | 8.0 | 8.04 | 0.0 |
| 12% | 6.0 | 6.12 | 0.1 |
| 25% | 2.9 | 3.11 | 0.2 |
| 50% | 1.4 | 1.71 | 0.3 |
| 72% | 1.0 | 1.28 | 0.3 |
| 100% | 0.7 | 1 | 0.3 |
Interesting, isn’t it? The power of time and money.
Where can we deposit our money that will give a 12% interest?
Mutual Fund or Unit Investment Trust Fund (UITF) are good investments where you can enjoy 12% or higher interest