4 days ago, I attended a workshop on Options Trading. There are about 50 participants for this workshop, comprising of doctors, business owners and other professionals. In this workshop, the trainer introduce the "Rule of 72" concept. Just as I expected, the majority of the participants have never heard of this before. In my work, I talked to a lot of homeowners who do not understand "Rule of 72" and the differences 1% can do.
In Summary, Rule of 72
- at Interest rate 1% - for $1 to become $2, it takes 72 years
- at Interest rate 2% - for $1 to become $2, it takes 36 years
- at Interest rate 3% - for $1 to become $2, it takes 24 years
If the bank offer an interest rate of 8%, how long does it take for $1 to become $2?
Simply take 72 divide by 8 - Answer: 9 years
In our everyday life, most Singaporeans take 1% very lightly. The coffeeshop owners who raises the price of a cup of coffee from 70 cent to 80 cent and the price of a cup of Milo from 80 cent to $1.
To most Singaporeans, 10 cent is nothing...but look again.
A Cup of Coffee
From 70 cent to 80 cent, its a 10 cent increase. In terms of percentage increase,
(10 cent divide by 70 cent) x 100% = 14.29% increase
A Cup of Milo
From 80 cent to $1, its a 20 cent increase, In terms of percentage increase,
(20 cent divide by 80 cent) x 100% = 25% increase
Applying the rule of 72:
A Cup of Coffee: 72 divide by 14.29 = 5 years for the coffeeshop owner to double his wealth
A Cup of Milo : 72 divide by 25 = 3 years for the coffeshop owner to double his wealth
1% and 10 cent...think again...
