How Rule of 72 Can Help You Invest & Retire With More Cash
As a rational investor looking for a low-risk retirement and investing ideas that work in Nigeria, have you ever considered investment options based on the potentials to double your cash? This is exactly why I am sharing the number-based investing tip called “Rule of 72”.
The Rule of 72 is a straightforward computation used by financial analyst to estimate how long your money will double based on what you currently earn on your present investment. It’s that simple! To compute it, just divide your expected return on treasury bills, bond, fixed deposit or equities investment by 72. The end result is the number of years, month or days it will take you to multiply your money by 2.
As a young and growing investor, I always look at this number to select the best investment while considering the potential of capital loss too.
Rule of 72 may not be the perfect maths but I think its an investing concept you can easily adopt without punching calculators; you can do the calculation in your head. Let’s say you expect to earn 11% annual return on your CBN Treasury bill, the Rule of 72 lets you see that it takes 6 years and some month to double your money – this makes the idea worth paying attention to.
How Rule of 72 can multiply your cash:
For someone who is planning to build a longterm portfolio spread across different asset class, the Rule of 72 will not only help you calculate the time you will double your money but also know how many times that cash would have doubled before you start spending in. This is useful for investors in their 20s, 30s or 40s so they can plan for retirement with the end in mind. For instance, you plan to retire in 21 years and are already earning 10.2% p.a from your mutual fund investment, the Rule of 72 indicates that you may double your investment in 7years and few months, 3times before you retire. So if you have N1m, that should increase to N2m in 7 years, N4m in another 7 years and N8m in the subsequent 7 years, which is 700% growth on your initial investment in 24 years.
The most interesting advantage of applying the Rule of 72 is that it lets you estimate realistic future earnings power based on your current portfolio, and planned retirement age bracket.
The table below shows the number of times you could have doubled your money using the Rule of 72 if you had started building a fixed income portfolio for your retirements based on your annual rate of return.
|Years to Go||10% Annual Returns||11% Annual Returns||13% Annual Returns||15% Annual Returns||20% Annual Returns|
Although, then Rule of 72 isn’t without its flaws; for instance an investor that decides to reinvest his/her interest earnings may not rely on the Rule of 72 to estimate how long his investment will double but from my intuition, such re-investing strategy should result in lower periods; almost half of the estimated period since re-investment drive compound interest.
The table above illustrates the simple reason you should start investing and building a fixed income portfolio earlier; the longer your anticipated retirement period, the higher the number of times you could double your portfolio value. The first row on the table shows how a 10% annual return is able to turn N100,000 into N6,400,000 while 15% p.a can turn the same investment to N51,200000 – No doubt, this will surely build your income to the next level – but only if you start early.
Like I shared the best strategy to outsmart and double your money more than the period estimated by the Rule of 72 is to re-invest your annual returns.
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