The no 72 is a metaphor for the multiplying potential of money .For most people this potential has been lost as a result of
inappropriate financial decisions. We at
power of 72 aim to help you unlock this hidden potential of money to multiply
by creating an action blueprint for you to follow: What is commonly called a
financial plan.
Q1 How does the no 72 help me get an idea of investments:
In the investment world we are often offered products with
differing returns; A fixed deposit with a guaranteed return of 9%,a MF with an
indicated return of 12% .How do we make sense of these differing nos other than
the obvious fact of higher returns being more desired. Well for one we could
find out the value of 100 Rs invested in
each of these instruments at the end of a period say 10 yrs. Here is where 72 comes in handy for on
dividing 72 by the expected return we get the doubling time for that
investment. So the fixed deposit will
double your money in 72/9 i.e 8 yrs, whereas the mf will do so in 72/12 i.e 6
yrs. Here is a summary of the values of
the 2 investments in 24 yrs.
Instrument Orignal Value Rs 200 in _ yrs Rs 400 in _ yrs Rs 800
Rs 1600 final
Fixed Deposit
Rs 100 8 yrs 16 yrs 24 yrs - Rs 800
MF Rs 100 6 yrs 12 yrs 18 yrs 24 yrs
Rs 1600
As you can see the difference of a mere 3% in the return has
led to a capital which 2 times more in a period of 24 yrs : a substantial difference. Thus the no 72 helps us understand the compounding power of returns.
Q2
Why is the potential of money to multiply as illustrated by the no 72 not
working for most of us:
Well the short answer is mainly inflation :The long answer
quite a bit longer . Lets start with
inflation and leave the long answer for later on .Inflation is the scenario
where everything becomes more expensive. So the basket of products and services
we get for 100 Rs today becomes costlier everyday .If inflation is 6% then in
12 yrs time(72/6)the cost of this basket will be Rs 200 and in 24 yrs(12yrs*2)
Rs 400.So while our money is multiplying in the bank ,inflation is working at
eroding its value.As a result the purchasing power of the money in a savings ac
would be Rs 8 times/4 times=2 times and in the MF 16 times/4 times=4 times.
Q3
How can we tackle inflation and still increase our wealth by using the power of
72:
The best way to tackle inflation is to invest some of your
money at least in inflation beating investments. What we mean by inflation
beating investments is assets whose return over time are quite a bit higher
than inflation. The asset classes that have
consistently done that in the past are Equity and Property; however there is a
catch: the returns are variable ie to get a higher return on average you have
to take the risk that returns for a particular year may be negative.
Q4 What are the other factors that limit/increase the power
of 72:
Well man is not just an investing unit but also an earning
and consuming unit. To the extent that the income is above the expense an individual
would be able to either generate a surplus or create a deficit. This will impinge
on his investing abilities and either enhance his wealth or reduce it.
The next article will focus on portfolio selection.
72 Financial
Failing to plan is Planning to fail.
