The number 72 has an uncanny ability to calculate the future value of money. So put away your financial calculator and let’s do some mental arithmetic.
Future value of your investment
If you want to know how quickly or slowly for that matter your money will double in value then simply divide the expected rate of return into 72. The result is the number of years it will take.
For example: You invest R10 000 at an expected rate of return of 12%.
It will take 6 years for your money to double to R20 000. If your return is only 6% then 72/6=12
It then take 12 years for your money to double.
When checking this on the financial calculator the value of the investment after 6 years is R19 738 and after 12 years is R20 121.
Future value of money
The rule of 72 can also be used to establish the impact that inflation has on your money in the future. If you divide the inflation rate into 72 then the result is the number of years it will take for your money to halve in value.
For example You have R10 000 saved under the mattress earning no interest and the inflation rate is 6%. 72/6=12
In 12 years your money will be worth R5 000. If the inflation rate is 12% then 72/12=6
In 6 years your money will be worth half.
Checking this on the financial calculator the value at 6% is R4759 and at 12% is R4 644.
Listen to Paul Roelofse's explanation of this to Africa Melane below...
Read more from Paul Roelofse at www.investforlife.co.za