Kris Krohn here with Limitless TV. Today, we're talking about compounding interest
and we're going to talk about how to make it super simple, what is compound
interest, and how do you figure it out with one simple calculation. Hang tight.
So we get it, investing is required to get where we want to go and that means
that you need to have some type of rule to understand what investments are good
and wet which investments are bad. Listen, you've probably heard me knock down
401k's, annuities, IRA's, sure they'll have their moments in quarters or even a year
where they'll make 15% or 20%
but you've got to average that out over the next twenty years, where they're
producing negative and losing money or sometimes making 3% or 4%
and over 20 years they're often on the averaging 3% or 4%, which
means they're not even keeping up with inflation. How long would it take you if
you're making 3% on your money to double your money. I'm going to
share with you a rule of thumb today and at the end of this video, I'm gonna give
you a bonus for my personal rule of what I need that coefficient, that one number
to be to determine whether I say yes to the investment or no, because some
investments, they're risky because they grow too slow, we got it super jacked up,
we live in a world that's like, oh if you're making more than 5% it must be
hyper risky. I'm like, man, if you're making less than 5%, you're probably
planning on going nowhere with your life and never getting where you need to get
to so you're the risky one, dude! Alright, that was a little wild for the
morning but my personal feelings on it, we got risk upside down, we want safety
and safety equals: guaranteed-broken-never-gonna-make-it-you-will-fail
I'm going to bring it down a notch, let's talk about this rule. What is the rule that we
can use today, we're talking bout the rule of 72, and it's a quick quick way of
understanding interest. Let's talk first of all compounding interest, get money
not just on your initial deposit but you also get money or interest on the
interest from the previous year and that's why it's called compounding
interest and the math can get a little tricky for the average person, you don't
want up one of these complicated financial calculators and I don't want
to teach you crazy algorithms, so instead, here's the simple question: How long does
it actually take for you to double your money? If you were looking at an
investment on real estate, if you were looking at an investment on a car rental
business or a trucking business or some gold, silver, precious metal purification
process, I mean, the world is filled with investment opportunity, that's really the
question, how long does it take for you to double your money? And I want to show
you a rule to answer this question, it's called the Rule of 72. Now this is
really simple, what you're going to do in this very simple equation, I wouldn't use
a calculator and all you're gonna do is take what's the offered interest rate,
what's the fixed rate of return, that's on top and I'm gonna divide it
underneath by 72. It's weird, don't ask me why, it's just the number because if
you'll take the fixed rate and you'll divide it by 72, it'll always tell you
the length of time that it will take to double your investment. For example, let's
say that I was earning a 10% return on my investment, well 10% compounding
divided by 72, 10% divided by 72, is going to equal 7.2 years. It'll take me 7.2 years
for me to double my money.
Let's take $10,000 and you're making 10% on it and it's compounding, so 7.2 years
later, $10,000 will become $20,000, 7.2 years
later, $20,000 become $40,000, 7.2 years
later, $40,000 become $80,000, well it's now taking you 22-ish years to take
$10,000 and turn into $80,000 and let me ask you, can you retire on $80,000?
No, I mean, that's usually just one or two years worth of income for the
average person but it does give you a concept now of, oh, how do I judge my
investments and how do I snowball them? How do I move them faster? What you'll
find is that, the higher the interest rate, the more money you'll make. Now in
this next segment, I want to talk to you about arbitrage, it's a big word, don't
get scared by it because I want to reveal my real rule of how do we take
the rule of 72 and how many years am I willing to wait for my money to double
where I will hit the trigger and button on, yes I'll invest in that or no I won't,
that's coming up next.
There was a philosopher in the 1800's, JB Shea,
and he basically said, creating wealth is a matter of moving money from
low yields into higher yields. Well he was actually introducing a concept there
called arbitrage and don't get freaked out by this big word but it's a good
word to know, you can have a positive arbitrage or a negative arbitrage. Let me
give you an example. Arbitrage, for simplicity,
let's say that it means spread. Let's say that I borrow money at 5% and invest it
in a vehicle paying me 4%, well what's the difference? Well I'm losing 1%, that's
a negative arbitrage, if I could borrow money at 5% and lend it out at 10%,
that's a positive arbitrage and that has a positive delta of 5%, so JB Shea what
he was talking about here with this rule of 72, it's all about managing your
positive arbitrage. Whether the money is money you've saved up or whether it's
money borrowed, the principle is the same, how do I take a little and turn it into
a lot? Well you want to create as big of a positive arbitrage as possible.
Let's give you an example. Let's say that I have a home with some equity in it and I
can borrow it on my home equity loan at 3.5% percent but I can invest it at
20%, well the difference between 3.5% and 20% is a 16.5%
positive arbitrage. I would go into debt and borrow money all day long if I could
get it working for me at that higher interest rate, as long as it had a
certain tolerance of risk and it made sense, right, nothing is risk-free in this
world but there's certainly a lot of things with lots of risk, so the risk
needs to be relative to the reward. That's a positive arbitrage or maybe I
save up $1,000 and you work with me on my lease option training where I
can train you everything about lease options, so you can buy homes with
no money and let's say you do a deal and you make $30,000 and you're $1,000
invested in. Well, $1,000 goes into $30,000 30 times, that's
like a 3,000% a 30,000% return on your money. That's a
crazy, awesome return as a 3,000 return, 3,000%, that's a
really awesome, positive arbitrage. Does that make sense what I'm sharing with you?
Well, I said that at the end of this video I would share with you one of my
personal rules for investing. When I use the rule of 72, if I can't double my
money in less than seven years, I generally won't even look at it.
Why? Because it's not a real investment, it's not a serious investment, it's not
an investment that can get me where I want to go in a
realistic timeframe. The further you go out in your crystal ball, if you want to
try and guess an investment 30 years down the road, holy heck, are you kidding
me? Who knows what the world will look like in 30 years? Who knows what
technology will do to the world in 30 years? Who knows what what's gonna happen?
But if I can use my crystal ball to help me understand 3, 5, 7, 10 years down the
road, there's a greater safety there because I have more control
on where I'm at and where I want to get to be. Doing things that are so long-term
out and with low interest rates or you use the rule of 72 and it's like you'll
double your money in 48 years, that's not a real investment, that's the riskiest
thing you could do because who knows what will really happen in 48 years. You
might not even be alive but you're alive now,
so make your money work for you smart. Just because you get a high reward
or a high return, it doesn't mean higher risk. In my world, there's plenty of
investing options where you put a little out there on the line and you have a
great return coming your way and it's gonna kick the butt from the 401k market,
the IRA, or the stock market and that's what you need and so that's how it use
your rule is 72, to gauge your investments, to gauge the time frame and
how realistic your investments are. If it's not giving me a timeframe of under
7 years, it may not be the most wise investment anyway, because a small amount
doubling every seven years for 50 years means that, that small amount is not gonna
turn into anything big enough with compound interest by the time I need it.
So do something realistic. And friends, that's how you use the rule of 72.
Don't you love having awesome simple tools? Listen, you got another one right now on
your tool belt so you can look at your investment
opportunities through a different lens to now ask yourself "Is this a realistic way
to get where I want to go?" Thanks for watching today,
I certainly appreciate you and be sure to subscribe if you want to get more
powerful information like this on a daily basis.