# Financial Wellness with Richmond Kwame FRIMPONG: Good money habits for bad economic times (II)

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Apply the Rule of 72

The rule of 72 simply computes how fast your money grows given an investment return over a period. It is one of the most useful ‘must-knows’ for every avid investor aspiring for financial Independence. This is because it demystifies your ability to become financially independent and estimates the number of years required at a given rate of interest to double up your investment amount at any given rate of return. This helps you plan your investment decision wisely without the complexities of financial calculators.

When the rate of return on your investment is known

Assuming your rate of return on an investment is 6 percent and you want to know how long it will take for you to double any investment amount you invest at the said rate. Divide 72 by the agreed rate (which in this instance is 6 percent). The answer you get from this exercise gives you the number of years it will take to double your investment. In this example, if you invested GH¢1,000 into an account that earned a flat 6 percent annual rate of return, your rule of 72 calculation will be 72 divided by the given rate of return: 6 percent (72/6). The answer is 12. This means at 6 percent per annum, your investment would double to GH¢2,000 after 12 years.

When your recommended holding period is known

In instances where you do not know the exact rate of return, but you have an idea about the number of years you want to see your investment income for financial independence, the rule of 72 can be used in reverse. The investor can use the rule to discover the compound annual growth rate (CAGR) they would have to earn to achieve their investment income goal.

In this example, let’s assume the number of years estimated to double your income is 4 years. To estimate the rough rate of return required to achieve this feat, you divide 72 by 4. The result in this case is 18, representing 18 percent. In essence, you will need an investment with the approximate return rate of about 18 percent (after tax compound annual rate of return) to achieve the doubled investment income goal.

That is a simple way to calculate earnings, but it will be helpful in determining whether there is a gap or potential shortfall in your savings strategy in your bid to achieve your investment goal. The rule of 72 can thus help you gauge whether your current savings plan is sufficient for reaching your short and/or long-term goals.

The rule of 72 by interest rate

Since interest rates can vary, the rule of 72 calculation can produce different results based on what you have invested in, and the promised or guaranteed rate of return.

To save you a little time, here are some common interest rates, plus the amount of time it will take for you to double your investment with each interest rate.

 Rate of Return 1% 2% 3% 4% 5% 6% 7% 8% 9% Rule of 72 72/1 72/2 72/3 72/4 72/5 72/6 72/7 72/8 72/9 No. of Years 72 36 24 18 14 12 10.3 9.0 8.0

Remember, this is an estimated value

Depending on changes in the rate of return over time, the investment instrument you are invested in, how you invest it, how interest is applied, and possible tax implications, the actual amount of time needed to double your money will vary. Even so, the rule of 72 can be helpful when you quickly want to compare the rate of growth of two investments; say, a property investment, a retirement fund, an equity fund or an emergency account. You can easily see at a glance which one is likely to yield a better rate of return to decide where the best place is to allocate your money.

Don’t just invest, insure!

Insurance and investments are crucial pillars of financial wellness; but they serve very different purposes, and hence, should not be considered interchangeably. Investing simply allows you to ‘put your money to work’ over a period in either a real or paper asset for an expected return. Inversely, insurance is ‘buying’ protection against an unforeseeable event bothering on life or non-life to mitigate a potential adverse impact on your financial future.

In other words, insurance primarily provides a financial safety net to take care of yourself and those you love when you need it the most. Even though many people understand this level of importance, many postpone any conversation on insurance to a later date after investing. In some instances, past unpleasant experiences with insurance products by insurance agents, make many shy away from anything insurance, and describe it as a façade. In many developing economies, more than 75 percent of the citizenry do not have any coverage. However, it is important to note that insurance is a very important anchor in your financial wellness equation as it bothers on life and well-being. Nothing is more important than life and the ability to make a living. So, it makes good sense to know the four types of insurance everyone needs in addition to their investments for a financially comfortable life, and strive to have them.

Life insurance

Life insurance comes in two basic types. The traditional whole life and term life. In simple terms, whole life can be used as an income tool, as well as an insurance instrument. As long as you continue to pay the monthly premiums, whole life covers you until you die.
Term life, on the other hand, is a policy that covers you for a set amount of time. There are other considerable differences between the two types of insurance so you may want to seek the advice of a financial expert before you decide which is best for you. Factors to
consider include your age, occupation, and number of dependent children.

The greatest benefits of life insurance include the ability to cover your funeral expenses and provide for those you leave behind. This is especially important if you have a family that is dependent on your salary to pay the bills. Industry experts suggest a life insurance policy that covers 10 times your yearly income. But that’s a number not everyone can afford. When estimating the amount of life insurance coverage, you need to factor in not only funeral expenses, but also daily living expenses. These may include mortgage payments, outstanding loans, credit card debt, taxes, childcare, and future college costs.

Health insurance

Literally, you and your family are just one serious illness away from impoverishment. In a Journal’s survey by the American Journal of Public Health, of more than 900 people who filed for personal bankruptcy between 2013 and 2016, more than two in three bankruptcies were caused by medical problems – from bills, income loss due to illness, or both.

These numbers alone should incentivise you to obtain health insurance or review and possibly increase your current coverage. But with rising co-payments, increased deductibles, and dropped coverages, health insurance has become a luxury fewer and fewer people can afford. The best and least expensive option may be participating in your employer’s insurance programme, but many smaller businesses do not offer this benefit. In the informal sector, it does not even exist.

So, if you do not have health insurance through an employer, check with other associations about possible group health coverage. If that is also not an option in your country, then you will need to buy private health insurance.

Long -term disability coverage

Long-term disability insurance is the one type of insurance most of us think we will never need. Yet, research shows that 3 in 10 workers entering the workforce are likely to end up disabled and will be unable to work before they reach the age of retirement. Often, even for those who have health insurance, a nice nest egg, and a good life insurance policy do not prepare for the day when they might not be able to work for weeks, months, or ever again. While most health insurance schemes pay for hospitalisation and medical bills, you are still left with those daily expenses that your pay cheque generally covers.

Auto insurance

On average, Ghana records nearly 12,100 road accidents in a year, involving over 20,400 vehicles. In the US, there are approximately six million car accidents every year. An estimated 38,800 people died in car crashes in 2019 alone. The number one cause of death for Americans between the ages of five and 34 was auto accidents, according to the Fatality Analysis Reporting System (FARS) in 2009 data (the last available data).

Over two million drivers and passengers received treatment in emergency rooms in 2009, and the costs of those accidents, including deaths and disabling injuries, were around US\$70billion.While not all states require drivers to have auto insurance, most do have regulations regarding financial responsibility in the event of an accident. States that do require insurance conduct periodic random checks of drivers for proof of insurance. If you do not have coverage, the fines can vary by state and can range from the suspension of your license, to points on your driving record, to fines from US\$500 to US\$1,000.

If you drive without auto insurance and have an accident, fines will probably be the least of your financial burden. If you, a passenger, or the other driver is injured in the accident, auto insurance will cover the expenses and help guard you against any litigation that might result from the accident. Auto insurance also protects your vehicle against theft, vandalism or a natural disaster, such as a hurricane or other weather-related incidents. Again, as with all insurance, your individual circumstances will determine the cost of auto insurance. To make sure you get the right insurance for you, compare several rate quotes and the coverage provided, and check periodically to see if you qualify for lower rates based on your age, driving record, or the area where you live.

Seek professional help

Most experts agree that life, health, long-term disability, and auto insurance are the four types of insurance you must have. Always check with your employer first for available coverage. If your employer doesn’t offer the type of insurance you want, obtain quotes from several insurance providers. Those who offer coverage in multiple areas may provide some discounts if you purchase more than one type of coverage. While insurance is expensive, not having it could be far more costly. In sum, don’t just Invest, INSURE!