Here’s some incentive to save your money – Our Communities

Dear Money Lady readers,

I want to share with you an investing magic trick — the Rule of 72.

The Rule of 72 is a way for you to easily and quickly determine how long it will take for your money to double in value. This method is based on a fixed annual interest rate and therefore can’t really be trusted when you apply it to a fluctuating return that you get from a stock market portfolio — however, it does come in handy to estimate the number of years needed to double your investment.

Here’s how it works: Take the number 72 and divide it by the interest rate you have or hope to receive on your investments.

Let’s work out a few examples together.

If you were to invest, let’s say, $5,000 at two per cent interest it would take 36 years for it to double to $10,000

(72 divided by 2= 36). Pretty pitiful, right. This is why, when GIC rates were so low last year, many advisers considered them the “fastest way to go broke” — they certainly didn’t keep up with inflation.

If you were to invest the same $5,000 at seven per cent, it would take 10 years and 3 months for it to double to $10,000 (72 divided by 7 = 10.285). Now that’s better.

If you think that’s fun, here are other two investment tricks that also predict future returns — the Rule of 114 and the Rule of 144. The Rule of 114 tells investors how long it will take for their money to triple in value and the Rule of 144 tells you how long it will take for your investment to quadruple.

Here are two examples, using the same $5,000 investment:

For the Rule of 114, take the number 114 and divide it by the interest rate you hope to receive on your investments. You have $5,000 invested at nine per cent, so it will take 12 years and 8 months for your money to triple, earning $15,000 (114 divided by 9 = 12.666).

For the Rule of 144, take the number 144 and divide it by the interest rate you willreceive on your investment. You have $5,000 invested at nine per cent, so it will take 16 years for your money to quadruple, earning $20,000. (144 divided by 9 = 16).

I know no one really likes to do math, but this is so easy, and it’s a great incentive to begin saving. Try it yourself with your projected return on your investments and see how long it will take you to reach your retirement goals and possibly give up working sooner than you think.

Christine Ibbotson
Ask the Money Lady

Christine Ibbotson is an author, finance writer and national radio host, now appearing on CTV Morning Live, and CTV News@6.  Send your money questions through her website at askthemoneylady.ca 

   Read full biography