Rule 72 - Simplicity is the Key!

'Rule of 72' is a simple and non-mind boggling way to determine how long it will take for an investment or a number, to double itself, given a fixed annual rate of interest. By dividing 72 by the annual rate of return, investors can get a rough estimate of how many years it will take for the initial investment to duplicate itself.

Cool isn't it!

Really! Say for example rather than an investment, let us use the current issue of inflation. Inflationary pressure is not going to abate and go away any time soon. As commodities such as raw materials and also end user products keep increasing (food and fuel) at a rate of 3% (what the authorities claims) per annum for inflation. How many years will it take for a man in the street with a REAL INFLATION of 5% having to pay twice the amount at present value?

Our man in the street as an example, the rule of 72 states that RM1 today at 5% inflation per annum, would take 14.4 years ((72/5) = 14.4) to turn into RM2 for buying the same goods or services. In reality, a 5% inflation will bring forth this real but unavoidable fact that affects everyone. If a RM 1 worth of an item or goods will cost RM 2 for the same item or goods in 14.4 years time, how are we going to afford basic necessities.

Well a lot of people out there will argue till their face turn blue... that other inputs like uneven raise of specific raw materials and other cost ect, ect, ect, must be taken into consideration. To lay claim that the 'Rule 72' does not apply in this aspect.

I will never dispute these group of learned people's views, but do look at the impending issue of how inflation will "eat" into your absolute RM1 or your purchasing power.

The following are some real life issues when inflation sets in:-

1. A Barrel of 21 pieces of Kentucky fried chicken cost RM21.99 in 1982 or early 80's, today it cost more then RM50 after 20 odd years.
2. McDonalds egg burger cost RM 1.10 in early 90's today it's more than double in price a short 10 years.
3. 20 years ago a loaf of 12 slices of white bread cost RM 0.70, and today the same 12 slices cost RM 3 today. A coumpounded increase of 7.55% pa.
4. A 'Kilometrico' ball pen cost 30cts 10 years ago, today it 80cts each. A 166.67% increase.

Now I have a question for all, "...in how many years will my money in the form of my savings will double?"

See chart below.

RoR Rule 72
2% 36.0 years
3% 24.0 years
5% 14.4 years
7% 10.3 years
9% 8.0 years
12% 6.0 years

RoR - rate of return (fixed simple return of investment)
Rule 72 - number of years it will take for your money to double.
Note: the rate of return gets less accurate when the fixed number (rate of return) gets bigger. Please be informed to use PV, FV, compounded returns for accuracy.

Choose wisely and the difference is in taking concerted efforts. Inflation is a robber that steals from all of us. We definetly do not want to wake up 20years later and fine out that our RM1 can only buy 3 slices of white bread.

Till then!

Tj Lim