The rule of 72 revealed

The rule of 72 is one of those very simple and useful tools that you can use in many aspects of your financial life.  It helps you to easily work out how long it would take to double your money for any investment you make.

When it comes to property investing, the rule of 72 can also be a useful tool as part of your assessment when buying a particular property and when selecting a particular suburb in which to invest.

How does it work?

What is the rule of 72?

It's very simple.  You just take the number 72 and divide it by your annual estimated (or desired) rate of return, and the number it gives you is the approximate number of years it will take for your money to double.

For example, say you have an investment that you would like to see return 8% per annum.

72 divided 8 = 9 years to double your money.

The rule of 72 also works for inflation.  You can divide 72 by the inflation rate to find out how long it will take for the cost of goods and services to double  So if inflation is 3% per annum:

72 divided 3 = 24 years for prices to double.

Using the rule of 72 for property investing:

The rule of 72 can be handy when assessing a property opportunity.

Let's say you're considering buying a 3 bedroom house in Melbourne.  The median price for houses in Melbourne is currently ~$900k.  If you expect a growth rate of ~7% per annum, then your property investment should double in approximately 10 years time.

72 divided 7 = 10.2 years to double.

There are various sources that confirms Melbourne houses have achieved an average capital growth rate of 7% per annum over the past 10 years or so and therefore using 7% is a reasonable assessment.

If you look at the median price for houses in Melbourne from 10 years ago, you'll find that it was around $450k which again supports your assessment.

This should give you a level of comfort that "all things being equal", if you buy a house in Melbourne, in theory your money will double in approximately 10 years.

There are variations.  The median house price is across Melbourne and some suburbs will perform stronger, whereas other suburbs will take much longer to double in value.

It's all about selecting the right property and if you don't know what and where to buy, then an experienced Buyers Agent is the best investment you can make.  I have seen first hand (many times) the difference this can make to your wealth creation. If you need a contact, just ask.

While knowing the time it takes to double your money might just seem like a fun exercise, you can also use it as part of an overall strategy.

Be aware that the rule of 72 also has its limitations.  It's an approximate tool, not an exact one, so don't use it to get a specific estimate of future returns.  Also, remember that it is unknown what your performance will be from one year to another.  Taking more risk can give you higher average returns, but it can also give you larger losses.

Over the long term, higher risk investments return more, but you should be aware of your overall risk profile when making investment decisions.

Hope you have fun using this simple but effective rule when assessing your investment choices.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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