EP 27 The Rule of 72

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Welcome back to Money Matters where I help guide you in becoming and better and a more confident investor. I know it’s hard to wrap your head around and visualize or often times understand the why you are investing. Especially when putting money away for something as ambiguous as retirement, routinely putting money away month-to-month looking to get at this money in 10, 20, 30 years depending on your time frame, and quite honestly, with the uncertainty of if you’re even going to be around to enjoy your hard earned savings when the time comes. I want to help you bring this idea of future savings and compound interest to the present, so at least while you’re saving you have something a little more tangible to hang on to, and possibly be enough for your why you’re doing it.

A simply trick and quick way that helps me take the often times take the intangible and make it more real in my eyes is what we in the investment world call – The Rule of 72. This can give you a close approximation on how much money you will have in a certain amount of time given a certain rate of return. And the best part about it is you don’t need to be a mathematical genius, or particularly good with numbers to figure it out.

The Rule of 72 was initially brought on as a quick and useful formula used to estimate the number of years required to double the invested money given the annual rate of return. While my team and I use powerful computing software in our financial estimates for client relationship that compute many different factors at once, The Rule of 72 comes in handy for mental calculations to quickly gauge an approximate value, or compute the annual rate of compounded return from an investment given how many year it will take to double the investment.

Let’s get into it. The formula for the Rule of 72 is Years to Double = 72/Interest Rate otherwise known as the rate of return your investment is getting.

Let’s run through a quick example so you know exactly how to use this formula going forward so you can ballpark your investments. Let’s say that you want to invest $20,000 dollars and you know that you can get an 8% annual compounded rate of return, how long will it take this investment to double?

Let’s go to our formula. So we take 72 and divide that by our 8% return. From our multiplication tables we know 72/8=9. So from that we can accurately state if you were to take $20,000 invested at 8% it would take 9 years for that money to double to $40,000. And this would work with any number imaginable. Obviously the more odd, or detailed the rate of return you may have to leverage a quick calculator, but nonetheless this is a great trick to use when you find you need a little motivation for investing.

Money, whatever your relationship is with it plays a huge part of most people’s lives. And it through my experience that I find investors especially have a healthy relationship with money, in the sense they can exercise discipline and patience in their plan. It goes back to the marshmallow experiment that you may or may not have seen on social media, where you tell the child if they don’t eat this marshmallow right in front of them and if they can exercise self-control then in the future they will get two marshmallow… That’s in a very simplistic way what investing is for adults. Right? Show discipline and emotional self-control and in the future you will be reward, but when dealing with investing you’re rewarded with more money, and compounded returns, not marshmallows, thankfully. This rule of 72 I know helps me stick to my plan in times when I feel maybe not as motivated to do so and instead spend the money frivolously to make myself feel better in the short-term.

You can use this formula both two ways. The way we already discussed or you could look at it like this. Say you have $50 thousand dollars and you need this money to double in say 10 years for a goal that you’ve set for yourself. Now it’s a matter of what is the rate of return you need to get there? Again let’s go to our formula.

Take 72/x = 10. We look at this and say ten times what number = 72? We know that’s 7.2. So we are now going to be looking for an investment, or asset class that historically gets us close to that 7.2% return mark so we know we are on track to make it to our goal.

I hope this trick helps you make investing a little easier to see the bigger picture boiled down with the use of the trick. Please know that I hold myself out in the Rochester community as a financial resource for those who need a trusted resources for guidance and financial direction. It all starts with a conversation. One I would be happy to have with you.

Thank you for watching and more importantly giving your finances the attention that they deserve.