Compound interest is a beautiful thing, and has even been cited as the “eighth wonder of the world.”

For those of us just starting out in investing, we might wonder how long it’ll take for our money to compound until we can double our investment.

Luckily, there’s a simple formula you can use to do just that – the Rule of 72.

What is the Rule of 72, and how does it work?

If the mention of math muddles your mind, don’t fret. The Rule of 72 is a simple formula to find out how long it will take for an investment to double in value.

All you have to do is divide 72 by your annual Rate of Return (ROR). The answer is the number of years it’ll take until your investment doubles. Or, you could just plug in your numbers here:

72 / Rate of Return = years to double

*input ROR as a number, not percentage

Using the Rule of 72 for your investments

Note that the Rule of 72 only applies to investments that earn compound interest, and won’t work on simple interest alone. Compound interest is simply interest accrued on interest plus principal, whereas Simple interest is interest accrued on the principal only.

Let’s take a look at how this rule will play out with some examples. If we take the average savings account interest rate in Malaysia of approximately 0.25%, it would take 288 years to see your principal double.

How about the Employees Provident Fund (EPF) savings you’ve accumulated over the years? Let’s take 2020’s dividend rate for conventional savings of 5.2%. It would take you 13.9 years for your investment to double.

This means that if you have RM240,000 in your EPF (which is the minimum target savings EPF advises Malaysians to have by age 55), you would have RM480,000 at 69 years old.

Let’s think a little bigger. Say you invest RM10,000 in a unit trust with annualised returns of 8%, it would only take 4 years for your RM10,000 investment to become RM20,000!

You can also estimate the interest rate you need in order to see your money double in a given timeframe. This can be helpful for goal-based investments such as saving up for a property or business venture.

72 / number of years = Rate of Return (ROR)

All of this is assuming that you’re not adding more funds to your initial investment, nor withdrawing any.

Putting debt into perspective with the Rule of 72

With a little tweaking around, you can also use this rule to open your eyes to how much money you could be losing. Whether that’s from your credit card debt, personal loan, mortgage or auto loan.

After all, with compound interest – it’s great if you’re getting it, but pretty damaging if you’re paying it!

 Let’s take credit card debt as an example. With an interest rate of 15% on your outstanding balance, it would take only 4.8 years for your outstanding balance to double. So if you owe RM6,000 in outstanding debt and don’t pay it off at all, you’d be paying a whopping RM12,000 4.8 years later!

Make compound interest work for you

The Rule of 72 offers a simple way for you to estimate the growth of your investments. By showing how quickly your money can double for you when put in the right places, it beautifully demonstrates the magic of compounding.

While it’s not an entirely accurate formula, it still helps to reinforce how important it is that you let this eighth wonder of the world do its magic.

That said, many Malaysians continue to let their hard-earned savings sit in basic saving accounts while inflation eats away at its value.

This is why we believe all Malaysians can, and should be investors in order to grow their savings and protect their money from inflation. Whether that’s putting your money in unit trusts, robo-advisories or self-investing in stocks.

Discover how you can invest in unit trusts through our seasoned unit trust advisors here.