One of the greatest invention of Einstein I would say is the rule of 72. It is a formula of wealth. Let me show how why learning investment skills are the utmost important thing in life. I will show you why investment skills and Einstein's formula can make you rich!
Example 1:
Let’s say Shinki invests in RM 1,000 and let it grows 10% per year over 50 years since 2010. See the calculation.
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K=growth constant
T=Doubling Time
K=growth constant
T=Doubling Time
According to ‘rule of 72’, T = 7/rate of return; Shinki will get RM 2000 when T = 7 because 70/10 = 7 years
2017: RM 2,000 (Double)
2024: RM 4,000 (Double)
2031: RM 8,000 (Double)
2038: RM 16,000 (Double)
2045: RM 32,000 (Double)
2052: RM 64,000 (Double)
2059: RM 128,000
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Wow, the answer is nearly about RM 128,000. Now, let me do a simple comparison.
Let’s say you park RM 50,000 in the bank account with zero interest rate.
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2010: RM 30,000 (Investment)
2020: RM 30,000
2030: RM 30,000
2040: RM 30,000
2050: RM 30,000
2060: RM 30,000
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Wow! It is still RM 30,000 at 2060. Sorry, I know you already know the answer. You might say:"I can put the money in bank!". You are right!
Let's say you choose to put RM 15,000 per in fixed deposit for 3% interest rate from 2010 to 2060.
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K=growth constant
T=Doubling Time
According to ‘rule of 70’, T = 70/rate of return; According to ‘rule of 72’, T = 70/rate of return; T = because 70/3 = 23 years
2010: RM 15,000 (Investment)2023: RM 30,000 (Double)
2046: RM 60,000 (Double)
2060: RM 131,000
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What has happened? What? Shinki can just use RM 1,000 to beat your RM 15,000 in fixed deposit (3%). Not to say the second example with ZERO return. What is the secret?
ANSWER:
Shinki has investment skills to get the 10% rate of return. The figure would be astonishing if the rate of return is more than 10%. Let's say a businessman can earn 30% per year with initial investment of RM 100,000. Just about 10 years, he/ she will become a millionaire. This is the power of exponential compounding.
Remark:
I simplified the 72 to 70 just for easy calculation. In fact, there is a similar rule called "rule of 70" in economics.
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