One of the most important thing that I’ve learnt in my work as an insurance agent is Rule of 72.
To some, it may sound very alien. However, understanding this rule can help you make saving or investment decisions more wisely. Does it well, and you might achieve financial freedom earlier that you thought.
What is it?
Rule of 72 tells you how much time your money will take to double.
Formula
number of years = 72 / (interest rate)
Example 1 – Bank Savings
If you were to save in a regular bank savings account with interest of 0.125%, how many years will your deposit of $10,000 become $20,000?
years = 72 / 0.125 = 576 years!
Well, you got to beat the longest living man on earth many times to see you money double!
Example 2 – Investments
Long term investment in well managed funds can potentially produce an of average 7% returns.
years = 72 / 7 = 10 years 4 months
Well, at least I know I get to see my money doubles in this lifetime. Yeah!
What is the impact?
Let’s assume that we have 2 friends, Mr Slow and Mr Fast (both 25 years old), and they live up to a more realistic 85 years old.
Mr Slow firmly puts his $10,000 in the bank whereas Mr Fast let his $10,000 work hard for him by doing investments.
How much will each have when they are 85 years old?
Mr Slow: $10,778.34
Mr Fast: $579,464.27
Mr Fast got $568,685.93 more! That’s the incredible power of compounding interest!
Advise for you
After providing financial advise to so many people, I realise that a lot of my clients keep money in the bank for psychological reasons. It is for the need to feel safe.
It is wise to keep enough emergency fund. Experts advise 6 months of income set aside as emergency fund. The rest should invest wisely to grow for future use.
Too much money sitting in the bank earning 0.125% is not doing any good for your medium to long term financial planning.
Remember, you work hard for your money. Your money must work harder for us. Furthermore, money never sleeps and works 24/7.
Start growing your money today.
