Sunday, July 13, 2008

The Rule of 72 for Investing

The Rule of 72 is a rule to use to know how many years you need to double the money of your investment. This rule is quite useful because it can be use in both ways. You can use the Rule of 72 to know how much time you need to double your money and you could know how much interest you need to double your money within a period of time.

The Rule of 72 is very useful and helpful for investment planning because it depends on how you apply the Rule of 72. You could use Rule of 72 in investment such as mutual funds, stock, bonds, real estate investment and business. You might be blurred and confused about the Rule of 72 if you read and stop reading here, so please read some of the examples below and I am sue you will understand the idea of Rule of 72 better.

Below will be the formula of Rule of 72 and some examples, I hope you could understand.

Formula of Rule of 72:

#Interest rate needed = 72/Number of years

#Number of Years needed = 72/Interest rate

Rules of 72: Investment in Mutual Funds and Bonds:

If you are investing in mutual funds and bonds, let's say the dividend/interest rate is 10% annually. In order to know how many years you need to double your money using 10% dividends/interest rate, you could use Rule of 72 to calculate it.

Years needed to double your money = 72/10 = 7.2 years

If you are planning to invest 5 years but you do not know the interest rate, you could use Rule of 72 to find out the interest rate you need to double your money in 5 years.

Interest rate needed to double your money in 5 years = 72/5 = 14.4% per year.

So, seek the help of mutual funds managers or consult the person that promote the funds to you, ask him/her about performance of certain funds, if the return is 6% or more annually, then it would be a good investment to go for. You could try to get some track records of funds too to get more detail about the funds you are going to invest in.

Rules of 72: Stock Market Investment:

Investing in stock market is consider one of the best investment vehicles available. Often we hear people saying investing in stock market is dangerous and risky. That is because of not enough education and knowledge about stock market investment. If you have the knowledge and education, then it would not be risky at all.

When you invest your money in a stock, then you are eligible to earn the dividends and of course, take advantage of appreciation of price of the stock you buy. So, buying stocks is a 2 way road for you, you can earn dividends and earn appreciation of price. The case is also the same for mutual funds but it is much more slower.

Dividends of Stocks and Rule of 72: Assume you invest in PBBANK which is the stock of Public Bank. The annual dividend is constant which is let's say 20¢ to 90¢ per year. so, let's say it is 75¢ this year. So, if you are holding 1000 units of share(RM10 per share), then you will earn RM750 [1000 units x RM0.55] for the dividends which means 7.5% per year. Don't forget that the price of stock will appreciate, so you are actually making more money from your investment in stock market.

Rule of 72: Stock in vestment for 5 years:

Time it takes to double your money = 72/7.5 = 9.6 years.

Normally, if the price of stock appreciate, then you will need less time to double your money.

So, try to calculate before you make any investment. Plan properly before buying, try to find the best investment vehicles that can help you generate more interest/dividends to double your money faster.

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