Tuesday, April 22, 2014

Do You Know When Your Money Will Double?

If you have money sitting somewhere for future use. Do you know when it will double in value?

Say, you have a hundred pesos and you put it in a savings account, time deposit or a higher interest yielding investment instrument, do you know how many years it will take for it to become two hundred pesos?

Actually there is such thing as the Rule of 72. It is a method to estimate an investment's doubling time by number of years.

How to calculate is to take the average return of your money and divide into 72. The result is the number of years it will take for the money to double.

Let's go back to the 100 pesos example. 
If you stash it in a pirate chest, buried deep in your backyard, it will earn zero interest. So 72 / 0 = undefined. Thus no  matter how many dance rituals you do, it will never double in value. It will even depreciate because of inflation (which I will talk about more in detail).

If you put the 100 pesos in a savings account, on average it will give you 1 percent per annum. So 72 / 1 = 72. Thus it will become 200 pesos in 72 years...

Lovely. Maybe, just maybe, you will still be alive by then.

If you invest the 100 pesos in a bonds or any other legal investment funds that will give you a return of 4 percent per annum. So 72 / 4 = 18.... Then it will take 18 years for the money to double.

Therefore the key to double your money is to invest it in instruments that will yield higher returns. Be careful though that the higher the return, it is also riskier. (I will discuss in detail in upcoming posts what types of financial instruments you can invest your money in.) 

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