I’m just going to put this out there—most people, myself included, are not naturally gifted at math.
In my elementary school memory, 3 or 4 kids in my class were math whizzes.
That’s it.
Using easy math, that’s about 15% of the class.
One of the most basic and misunderstood concepts about money is how it grows, either for you or against you.
It’s hard to understand how powerful a 5% return on a $15m investment account is. If you owned the assets inside the account and assumed you earned a 5% return, your net worth would grow by $750,000.
That is a third of what most people make in their lifetime, working 2000 hours per year.
It’s incredible yet challenging to conceptualize because 99.9% of people will never witness how powerful small returns are with large sums of money.
And truthfully, 99.9% of us don’t need $15m.
But this concept of how money works is essential.
According to Fidelity, the average balance on a retirement account for a 55-year-old is $256,244. So, if you take the 5% return example above and apply it to the average account balance, you’d get a $12,812 return. Yawn—that’s just a few months of spending for tens of millions of Americans.
You’d shrug your shoulders and move on.
But hang on, let’s go a bit deeper here cause there’s something here.
After all, Albert Einstein said compound interest is the 8th wonder of the world.
Enter the Rule of 72, a simple and effective way to help understand the power of returns and the value of patience.
By dividing your expected returns into 72, you can quickly determine the amount of time it takes to double your money.
Let’s take this example from Fidelity again: it would take the average 55-year-old a little over 14 years to double their money.
Assuming the returns stay at 5%, this person would have approximately $500,000 at 70.
You may be reading this and thinking wow, that isn’t a lot of money; I am that average family above. And you would be correct. On the one hand, $500,000 is a lot of money, but on the other hand, if you earn $120,000 a year and spend $85,000, you need more than that to retire comfortably.
But remember how I mentioned the Rule of 72 also reveals the value of patience?
Here’s the magic—compound interest does its thing when we zoom out and look over the course of decades.
If you leave that original investment of $250k and go for 35 years at 5%, you’d end up with $1.379m. Not bad.
Add some monthly contributions in there, and you’ll get significantly more.
Do some strategic tax planning along the way.
Even more.
A small inheritance.
Even more.
The Rule of 72 gives you a fast and effective way to do math in your head and helps you make better financial decisions.
Let’s see this in action.
You and your spouse are at a car lot. Two cars are in front of you, and they are priced differently by $15,000.
Both cars look great, but the more expensive one stands out.
You make about $150,000; the more expensive vehicle is about $65k.
So, if you save $15k by buying the cheaper vehicle, you’d just invest the savings because you have the cash on hand.
You then do the following math: “If I invest that $15k for 14 years at 10%, we’d get $60k, and $215k if we leave it in the rest of our career.”
Deal done.
You lean over to your spouse and say, “I think we should go with that $50k car.”
And just like that, the Rule of 72 does its magic by helping frame a financial decision properly.
Don’t use the Rule of 72 sparingly, use it often, with confidence.
In summary
- Rule of 72 Equation – 72 / return = how long it takes to double your money.
- Remember that compound interest is the 8th wonder of the world.
The Rule of 72
Just going to put this out there – most people, myself included, are not naturally gifted at math.
If I go back to my elementary school memory, there was maybe 3 or 4 kids in my class that were math whizzes.
So using easy math, that’s about 15% of the class.
One of the most basic, and misunderstood concepts, of money, is how it grows, either for you or against you.
It’s hard to understand how powerful a 5% return on a $15m investment account is. Simply by owning the assets inside the account, and assuming you earned a 5% return, your net worth would grow $750,000.
That is a third of what most people make in their lifetime working 2000 hours per year.
It’s incredible.
The reason this is hard to conceptualize is because most of us, like 99.9%, will never witness how powerful returns are with large amounts of money.
And truthfully, 99.9% of us don’t need $15m.
Most people middle age adults with families spend $5-10k a month.
But this concept of how money works is important.
According to Fidelity, the average balance on a retirement account for a 55-year-old is $256,244. So if we take the 5% return example above and put it on the average account balance, we’d get a $12,812 return. Yawn – that’s just a few months of spending for tens of millions of Americans.
We shrug our shoulders and move on.
Enter the rule of 72, a simple and effective way to help understand the power of returns and the value of patience.
By dividing 72 by your returns you think you can get, you can quickly determine the amount of time it takes to double your money, without a calculator.
Let’s take this example from Fidelity again, it would take the average 55-year-old a little over 14 years to double their money.
Assuming the returns stay at 5%, this person would have approximately $500,000 at 70.
You’re may be reading this and thinking wow, that isn’t a lot of money, I am that average family above. And you would be correct. On one hand, $500,000 is a lot of money, but on the other hand, if you earn $120,000 a year and spend $85,000, that’s not enough for you to comfortably retire on.
But remember how I mentioned the rule of 72 also reveals the value of patience?
Here’s the magic – when we zoom out and look over the course of decades, compound interest does its thing.
Leave that original investment of $250k and go for 35 years at 5%, you’d end up with $1.379m. Not bad.
Add some monthly contributions in there and you’d significantly more.
The Rule of 72 gives you a fast, and effective way, to do math in your head and help you make financial decisions better.
Let’s see this in action. You and your spouse are at a car lot and there are two cars in front of you, with a $15,000 difference in price.
You know the rule of 72.
You lean over to your spouse and say, “Honey, we can turn that money into $60,000 in 14 years if the stock market returns an average of 10%, and $215,000 if we let the money grow for the rest of our career, not including what we are saving now. Let’s go for the cheaper vehicle.”
And just like that, the rule of 72 does its magic by helping frame a financial decision properly.
Don’t use the rule of 72 sparingly, use it often, with confidence.
