With the Rule of 72, you can estimate the future value of your investments with uncanny reliability.

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 in 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 let’s 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.

The magical number 72 in the financial world can help you to get a better understanding of the value of your money in the future.

72 can be used in a very easy way to establish values in the future with extraordinary accuracy.

Inflation is a measurement of the value of your money over time. The higher the consumer price index (CPI) the less your rand will be worth. That is the main reason why the Reserve Bank is mandated to keep the rate below 6%.

Let’s get an idea of how damaging a high inflation rate can be by using the rule of 72.

If inflation is 6% then simply divide 6 by 72 and the answer 12 is the number of years your money will take to halve in value.

So inflation at 6% will halve the value of the rand in 12 years.

If inflation was allowed to reach 12% then 12 divided into 72 results in 6 years. So it will take 6 years for your money to halve in value.

The rule of 72 will help to understand why it is so important to keep inflation under control and as low as possible. A little inflation is a good thing for an economy. However, if it is rampant then it will destroy an economy in no time. Just like Zimbabwe a few years ago when it reached a zillion%.

It equated to money halving in value every hour. At the time it made financial sense to pay for a coffee at the local restaurant before having it as it would cost double by the time you finished it.

Just by dividing the expected rate into 72, you get a very accurate picture of how your money is affected.

Filing season opened on the 1st of July 2018 and it’s too late to do anything about last the tax year. You are on top of your tax return when you know before you complete the return what to expect. Tax planning should take full advantage of all options before the end of the tax year in February. Completing the tax return then becomes a formality.

Here are some ideas to work on before February next year.

Medical aid
If your saving account runs out during the year keep on sending the medical bills to your medical aid company. They tally the expenses for you on your tax certificate which are not paid by the scheme. This amount is claimable on your return after certain limits. This will save you from keeping records as proof of SARS.

Retirement contributions
You can deduct up to 27,5% of the contributions made towards your retirement funds against your taxable earnings.
This is a huge opportunity to get more into your retirement savings at less cost. You effectively get back whatever your marginal tax percentage is. So, if you pay 45% tax then you receive 45 cents for every rand you save. You can make a top-up to the maximum limit before the end of February 2019.

Capital gains tax
If you are planning to sell off an investment such as a unit trust or gold coins, then take full advantage of your exemption on capital gains tax by selling off your assets over different tax years. You could sell before the end of the tax year in February 2019 and then in March 2019 at the start of the new tax year. This way the disposal of the assets gets a double deduction. The current inclusion rate on CGT is R40 000 per annum.

You should e-file your return before 31 October 2018.