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Rule of 72
Before that, let look at what Albert Einstein called Compound Interest - "The most powerful force in the universe". The rule of 72 is an interesting formula used in the financial world. It is something to do with the above caption and is widely used in order to determine either the impact of inflation rate and compounding interest returns. Below are some example on how we could apply the rule in our daily life. Scenario 1:
A burger cost MYR1.50. Say the inflation rate is going steady at 5% yearly on the ingredients that make up the burger, how much time it would take for the same burger to cost MYR3.00? 72/(interest rate) = Number of years
72/5 = 14.4 years Scenario 2
You currently have USD500,000. You could like to double your money in the next 10 years to USD1,000,000. So, with Rule of 72, we can figure out what kind of investment vehicle is going to help you reach that million dollar goal. 72/(interest rate) = 10 years
Interest rate = 72/10
Interest rate = 7.2% There you go, you will need an investment vehicle that could give you up to 7.2% interest rate to double your money in 10 years time. Normally, this would mean putting those in a lower risk fixed income like mutual fund or a dividend yielding mutual fund. There's no way you could get such interest rate with the current fixed deposit rate. It's amazing how much benefits you could derive from this simple formula.
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