The Rule of 72: The Quick Trick Millionaires Use to Grow Money
If you've ever wondered how millionaires quickly estimate when their money will double on an investment, the rule of 72 is a simple mental shortcut that turns confusing math into an instant wealth-building insight. If you are investing money into an asset, most likely you are tracking the return on your investment. One way to track that is by determining what the interest return is. Interest is the money you earn, when you let others use your money- or on the opposite side of the coin, the extra money you pay when you borrow someone else's money.
Example #1
You invested $100,000 and generate a 10% interest return. In one year, you make 10,000 in interest (aka profit)
Example #2
You purchased a car for $40,000 and the bank charges you 5% interest over the course of the 5-year loan. You pay the bank $5,290 in total interest, above and beyond the cost of the car. Your total pay back would equal $45,290
The rule of 72 determines how quickly your invested money doubles at a specific interest rate.
Example 1:
You invest $100,000 at a 10% return.
72 divided by 10 = 7.2 years
It takes 7.2 years at a 10% return for your $100,000 to be worth $200,000.
Example 2:
You invest $172,000 into a dividend paying stock that pays 6.3% interest.
72 divided by 6.3 = 11.42 years
It takes 11.42 years at 6.3% return for your $172,000 to be worth $344,000 (with no additional contributions and reinvesting the dividend)
This is important for all investors to have a general idea of what interest an investment pays. Using this nifty formula, you can determine how long it will take your hard-earned money to double in value. Over the last 30 years the S&P 500 has returned approximately 10%, meaning your money would double every 7.2 years.
The sooner you start investing and building your asset army the better. Client Greg graduated with an engineering degree and made $75,000-$110,000 per year over an 8-year working period. He invested heavily in index funds by keeping his personal expenses low. He accumulated $380,000 in his retirement account by the age of 29. If Greg decided to sit back and chill until the age of 60, contributing no more money and blowing every last penny of his weekly paychecks, Greg would end up with $7.3 million. Greg has won. If Greg wants to retire early at 50 and sail the world, his balance would still be $2.8 million, not too shabby. At a 10% return Greg would be able to withdraw $280,000 annually without decreasing his $2.8 million balance.
Understanding the rule of 72 and the power of compound interest should motivate you when the mundane process of investing seems boring.
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