Would you like to double your money?
Well, the rule of 72 will help you determine just how long it will take to do that.
The formula is simple, take 72 and divide it by the interest rate you believe you are making on your money.
For example, 72/10 = 7.2 years for the money to double. 10 being the % of interest you expect to get on your money.
If you want to double your money within a certain time frame, you can also reverse the formula.
For example, 72/7.2 = 10. If you want to double your investments value in 7.2 years, then you will need to aim for an interest rate of 10% on your money.
Let’s use a real-life example. Let’s say I have $100,000 in an investment account getting 10% interest on average each year. After 7.2 years, this money will grow to $200,000.
You might be saying that at 10% a year is only $10,000 a year, and after 7 years you’ll only have $170,000. If you do 100,000 * 10%, you indeed end up with $10,000 each year. However, this formula does not take in account the effects of compounding interest. See, the first year you’re making 10% on $100,000. The next year, you’re making 10% on $110,000. This keeps occurring and it grows much more quickly the more money you have invested.
Here’s an interesting take on it. You can put $2,000 in an investment account with a 12% interest rate for 6 years. Once you hit year 6 you stop putting your $2,000 in every year and you let it compound on its own.
Your friend sees the progress you made financially and starts to put in $2,000 every year much like you did 6 years prior. Your friend can put in $2,000 into the account every year until retirement and his investment account will never catch up to yours during your life time.
You can run the calculations here to see the numbers for yourself.
These two aspects of investing are the basics to build your financial education on. Some might not like stocks due to the amount of work needed for due diligence. Some may also dislike real estate due to the amount of risk and work that one may have to put in. Nothing wrong with either decision.
However utilizing compounding interest through a financial adviser, is a no brainer. You can meet with a financial adviser, discuss a plan of action that works best for you, invest your money, and you watch it grow over time. Boom, done. That’s it!
Just like that you begin to utilize the power of compounding interest. Now you can use the rule of 72 to figure out when it grows enough for you to buy a sweet sweet Lamborghini Hurrican, or your other choice of luxury car. Just don’t spend it all on coffee.