Strengthen your investment by Rule of 72
June 26, 2019
by Shella Georgina Beatrice
When people talk about investment, it will always be about how to make thousands in future from their initial capital of fund. Frequently, an investment is associated with the time period. Even more importantly, an investment requires sacrifices as investment funds need to be locked up for years. Another definition of an investment is deferring current consumption in exchange for future consumption.
It is always a big challenge to start up an investment fund. Investors need to have the courage and be more determined about their investment decision. For instance, opting to cut down all the entertainment, food and clothing expenses are a difficult and somewhat painful decision. Rarely do people react positively towards those decisions. Many are still reluctant to the idea of changing their spending habits for their future investment.
According to the recent Department of Statistics Malaysia report, the life expectancy at birth for both female and male has increased. People are expected to live longer now. Therefore, they need to have sufficient amount of retirement funds before reaching the retirement age to enable them to live a comfortable life in many years to come.
It is also essential to plan the retirement fund where the amount is similar or exceeds the previous monthly income that they used to enjoy before with the intention to maintain their standard of living. In this modern era, the older generation cannot depend solely on their children to support them financially in their old age. They not only have to be prepared physically, mentally and socially but also financially.
I would like to share a simple method of investment that people can easily apply in their investment strategy without the need to use complicated formula. The key to an investor’s success is by strengthening your investment selection. It is also vital for the investors to understand and recognise their risk tolerance.
Carefully setting your financial goal and identify your own risk tolerance will allow you to invest comfortably and confidently in the financial system. Structured investment selection will lead to proper investment strategies and equip the investors in future uncertainty or challenges throughout the investment period. One rule of investment that investor can follow is by applying the Rule of 72 in their investment selection.
The Rule of 72 was invented by Albert Einstein, German-born theoretical physicist. He considered it as the most dominant power on earth. The Rule of 72 relates to the years required for an investment to double by dividing the interest rate into 72.
For a start, it is advisable to put aside at least 10% of your monthly income for investment, specifically for retirement fund. Assuming your monthly income is RM10,000. Therefore, the amount of investment will be 10% of the RM10,000 which equals to RM1,000.
As we are applying Rule of 72, this RM1,000 will double up to RM2,000 in 9 years with a compounded rate assuming at 8% yearly. However, if we substitute the compounded rate to 1 percent yearly, the investment will take longer period up to 72 years.
Similarly, Rule of 72 can also be applied in managing your expenses, taking into account inflation or interest rate. For examples, if inflation rate rises to 3%, your money will lose half its value in 24 years, and if your university tuition fee increases at 2% yearly, the fee will double in 36 years.
In conclusion, the Rule of 72 will work effectively and able to strengthen the investment if the investor is willing to invest in a diversified portfolio, and dare to look forward to better compounded interest rate offered in the financial system.
Shella Georgina Beatrice is a lecturer from the School of Business, Faculty of Business, Design and Arts at Swinburne University of Technology Sarawak Campus. She can be reached via email at firstname.lastname@example.org