Inflation – the enemy
The inflation rate represents the rising cost of living which devalues your money, resulting in a loss of purchasing power over time. To improve the value of your rand into the future you need to make investments which provide returns that are higher than the inflation rate.
Keep it real
Real rates are important if you want your investment value to grow above the cost of living. The difference between the nominal rate of return and the inflation rate is the real rate which represents your actual value over time.
So lets use the rule of 72 to compare how various rates of return affect your future values. The rule is...
Length of time it takes to double your money = 72 divided by the expected return on your investment
If you achieve 12% rate of return then you divide this into 72 and the answer 6 is the number of years it will take for your money to double in value. So, if you invested R10 000 at 12% in 6 years time you will have R20 000.
If you expect a 6% return on your money it will take (72/6=12) 12 years for your money to double.
So the same R10 000 takes twice as long to get to R20 000.
The rule of 72 is a magical number which easily works out future values with amazing accuracy. We should all be mindful of how it can help to understand the future value of money.
Listen to the audio below for more information...
Read more from Paul Roelofse at www.investforlife.co.za
This article first appeared on 702 : Keep it real with Rule 72 (an easy formula that really works)