There are many rules and formulas that try to help us improve our financial management. One of them is the rule of 72, which, is used to try to refine the objective of our investments.
We invest in an investment fund
It is obvious that when we hire savings insurance , or when we invest in an investment fund , our goal is always the same: that our money produces more money. However, we are not always clear about the deadlines that we will have to use in our investments to obtain certain amounts, that is, to meet our objectives.
The rule of 72 is precisely one of the existing formulas to try to refine our objectives to the fullest since, it helps us visualize in approximate time in which an investment will double . Be careful, it is not an exact and perfect formula, as we will see later, as there are some elements that it does not take into account.
How the rule of 72 works
This formula is applied very simply. It is only about dividing the number 72 by the interest offered by the savings or investment we choose . The result of this division will be the number of years necessary for our capital to be doubled. It is really a simple operation and that we can all perform without major complications.
For example, if you hire a 1% deposit with automatic renewal and want to calculate how long your money would double, you only have to make the 72/1 division . Indeed, with that profitability you would need no less than 72 years to be able to double the money invested.
At the other extreme, imagine that you go to an investment that gives you an average return of 6%, in this case the division would be 72/6, that is 12 years would be the period of time necessary to double your investment.
Of course, this rule is based on the fact that profitability remains constant over time and that the same investment tool or others that provide such profitability is used, since otherwise, when profitability fluctuates, it is more difficult to use the rule. In these cases it is better to establish an expected average return , although the ideal would be to perform the calculation from time to time depending on the evolution of the performance of your financial products.
The formula also helps us to better understand the importance of compound interest in the idea of making our money work. We show you things you should know about bank interests.
In a period of only 10 years at a yield of 10% thanks to the compound interest your money can double. Remember that compound interest is the basis of the success of savings or investment, a figure that we do not always take into account since we visualize savings too linearly, when it is not. If I have received € 100 for my € 1000 investment, I reinvest € 1100 in the same product, which will yield € 110 next year, and so on.
However, the application of the formula of 72 is not really accurate at all, much less.
First, as we have already indicated, it is based on a constant result of the profitability of your products. This is something that can be achieved with products such as the most conservative savings insurance , although not so much in the long term, when what matters is to seek profitability and not so much security.
On the other hand, and very important, this rule does not take into account the effect of inflation on the value of your money . If the rate of return of your product is 10%, but, you are in an inflation scenario of 3%, the net value of your rate of return will be 7% . Therefore, although it is an interesting tool to fly a pen, try to calculate how much time it will take to double our capital , it is not so much to fine-tune the value of our profitability.