Make the Rule of 72 work for you !
Once upon a time an Overseas Filipino Worker (OFW) started working abroad. At the age of 29 he had already saved a total of P 100,000.00 (Philippine peso)
Since the only investment vehicle he knew about was putting his money at the bank he went to the bank and deposited his P 100,000.00. The bank manager gladly accepted the money and even recommended that he put it at a time deposit account so that it would yield a higher interest rate at 4 % per annum.
So he placed his money in the time deposit account and waited until he reached the age of 65. At the age of 65 he went back to the bank and asked to withdraw the P 100,000.00 in his time deposit account. Lo and behold his P100,000.00 already became P 400,000.00 because of the interest. So he withdrew his money from the bank and lived happily ever after.
Is this a “live happily ever after” story or not? Do you consider this OFW as somebody who has “wisely” handled his money? Is he really earning the maximum potential for his money or is he making somebody else rich.
The rule of 72 gives us the answers to the above questions. This rule determines how many years it will take your money to double. The rule is expressed in this very simple equation: 72 / interest = No. of years it takes for your money to double
In the case of this Filipino OFW, every 18 years his money will double. 72 divided 4 % per annum = 18 years. So if he deposited his P 100,000.00 at age 29, his money will become P 200,000.00 at age 47. Add another 18 years then he reaches the age of 65. This time his money becomes P 400,000.00.
So what does the bank do with that P 100,000.00 ? Well, they take the OFW’s money and invests it at mutual funds, the stock market, the money market, government bonds, corporate bonds and even consumer loans etc. averaging a 12 % return per annum. Using the Rule of 72, the OFW’s P 100,000.00 will double every 6 years. (This is computed as follows: 72 divided by 12 % interest = 6 years)
After 36 years of waiting, the OFW claimed his P 100,000.00. You wouldn’t be surprised why the bank manager willingly and gladly gave him back the P 100,000.00 plus the interest of P 300,000 amounting to a total of P 400,000.00. No sweat, they already made more or less a total of P 6,400,000.00 from the OFW’s P 100,000.00 deposit. Now you tell me if that isn’t hi-way robbery !
If you want to be wealthy and be a better steward of your money then think like the bank! Make the Rule of 72 work for you !
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