Question – I have never been good with financial numbers, can you give me some tips on what numbers are handy to understand?
Answer – We often here the quote ‘Lies, damn lies and statistics’. Numbers can play tricks with our financial perspective and what we have provided are really handy to know and will serve you well in grasping key financial facts. They also make good dinner party conversation!
Rule of 72 Our favourite number! It can be used in a few different ways
- To know what rate of return (interest rate) you need on your investment to double in XX years. All you do is divide 72 by the number of years that you wish to see your investment double in value. For example, if you want to double your money every 10 years, you divide 72 by 10, giving 7.2. Therefore, you need a return of 7.2% to double your money in ten years time.
- If you know what rate of return you will earn you can work out how many years your investment will take to double in value. Simply divide that rate of return into 72. For example, assume a return of 5%, that means you would double your money every 14.4 years (72/5 = 14.4)
(Important, you may have noticed that we don’t use the actual percentage number (5% = 0.05) but have it multiplied by 100)
Rate of return required to win back losses – This simple math often gets even professionals confused as it is a little counter intuitive and hard to swallow when you have suffered a major loss.
For example, say you invested $100,000 on stock XYZ and it dived 50% in value, it is now worth $50,000. You now need to double your money (increase by 100%) just to get back to even (back to $100,000). This highlights the need to be extra careful with investments as losing 50% is easier than making 100%. This is a much bigger problem as you reach retirement as age because you don’t normally have the time to recoup the losses. Therefore, as you come closer to retirement, you should position your investments in a way that you day to day income is not reliant on risky investments, like shares, so that they have time to recover from inevitable losses.