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The Rule of 72 Formula for Your KiwiSaver Growth
An investment will grow in value if it is in the form of deposits or managed fund (KiwiSaver is one of it). Understanding how this investment grows over time is crucial to investing. The Rule of 72 is one of the most straightforward and useful tools to calculate the investment growth.
What is the Rule of 72?
The Rule of 72 is a mathematical principle that estimates the time it will take for an investment to double in value. You take the number 72 and divide it by the interest earned on your investments each year to get the number of years it will take for your investments to grow 100%. It can also calculate how your investment will fall. The rule of 72 can only be used on investments earning compound rates. e.g. KiwiSaver, and deposits.
The formula is: Number of Years to Double ≈ 72 / Annual Rate of Return
Examples of the Rule of 72
Example 1, if you have an investment expected to grow at an annual rate of 6%, the Rule of 72 tells you that your money will take approximately 12 years (72 / 6 ≈ 12) to double.
Example 2, if your investment is earning an annual rate of 10%, the Rule of 72 tells you that your money will take approximately 7.2 years (72 / 10 ≈ 7.2) to double. This is to say, if you invest 10 thousand dollars now, you will have 20 thousand dollars in about 7.2 years. This also means that then 20 thousand dollars will double again in another 7.2 years, assuming the same growth rate. You will have a total of 40 thousand dollars in a little more than fourteen years time. This is also on the fact that you’re not adding to your initial investment over time.
The application to your financial planning
In daily living each household has its financial goals, short-term goals (e.g. an overseas trip), medium-term goals (e.g. property purchase), and long-term goals (e.g. children education, for retirement). For example, if you are planning to buy a property and want to double your investment (deposits) in 6 years, then you will need to know what kind of earning rate to help realise this goal. You can simply divide 72 by 6 to get 12. In this way, you will need to find an investment with a 12% annual rate of return for it to be doubled in approximately six years. This is similar to save for retirement.
The importance of the Rule of 72 in financial planning
The Rule of 72 in financial planning can help guide you toward making smart investing decisions to ensure you’re on track to reach your goals — whether that be savings for retirement, buying a house, planning a wedding, or education expenses.
KiwiSaver and managed funds are good investments for your financial planning.
Limitation of the rule of 72
You’ll notice the formula uses the “approximately equals” symbol (≈) rather than the regular “equals” symbol (=). That’s because this formula offers an estimate rather than an exact amount, and it’s most accurate when used on investments that earn a typical rate of 6% to 10%. The following table has a summary of the time differences.
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