Albert Einstein believed that the Rule of 72 was a more important discovery than his
theory of relativity. The first reference of this rule comes from Luca Pacioli who
is regarded as the “Father of Accounting”. In his 1494 book Summary of Arithmetic, Geometry,
Proportions and Proportionality (Summa de Arithmetic, Geometria,
Proportiono et Proportionalita) he explains the importance of this rule.
Being able to double your money in just a few short years is literally everybody’s
dream. How many times have you wished upon a falling star that you’ll wake tomorrow with
six figures in your bank account? Well, I’m here to tell you that this is possible. It
is not a fantasy. In today’s Practical Wisdom video, I’ll be talking about the Rule of 72.
So, stay tuned and be ready to learn.
Also, get my free passive income guide using the link in the descriptions.
Number 1. The Rule of 72
The rule of 72 is applied while setting financial objectives, when analysing economic trends,
planning for financial goals, evaluating investments and also helping you with debt.
The way it works is by determining how long it will take for an investment to double while
receiving a fixed interest rate. Here’s how you calculate it: take 72 and divide it by the rate
of return you hope to earn. For example, if you plan on earning an interest of 5%, divide 72 by
5. That gives you 14.4. This is the number of years it will take you to double your money.
There are many advantages to this rule. You can, for example,
quickly and simply determine whether you are keeping up with the trends. Along with that,
you can also ensure that you are on the right track when it comes to your financial decisions.
It can also be used to calculate inflations because it shows you how many years it will
require for the value of the starting sum to fall in half, rather than double.
All this being said, using this rule also comes with some disadvantages. For example,
it can only be applied to assets which calculate compound interest annually. This rule also has
some accuracy problems because it can’t calculate rates below and above 6% and 10% respectively.
Nonetheless, don’t let these disadvantages drive a
wedge between you and the rule of 72. Get a hold of a financial advisor who
can thoroughly explain this rule in more depth and can guide you appropriately.
Number 2. Compound interest
As stated before, the rule of 72 only works with compound interest. When you understand
the rule and the power of compound interesting, you have the secret recipe to financial growth.
Having also discussed the rule itself, let’s talk about compound interest. The fantastic
thing about it is that the longer your money is invested, the greater your earnings will be. In
other words, the interest earned on your initial investments is added onto your initial investment,
and this cycle keeps going. Basically: invest your money in it and then forget about it.
Now, if you want to know how long it will take to double your current savings, you’ll use the
rule of 72. Take your interest rate, let’s say 6% and divide it by 72. 72/6 gives us 12:
this is how long it will take for you to double your money. When it comes to compound interest,
look for one where the interest rate is high because the higher the interest rate, the
quicker you’ll have your doubled amount. Get in touch with a financial advisor, ask for the best
compound interest and use the rule of 72 to see just how quickly you can grow your bank balance.
Number 3. Investments
The rule of 72 can also be used to evaluate your investments. At some point in life, we all want to
make investments, and you can definitely use this rule to have a key insight on how long your money
will take for it to double. Therefore, if you are considering investing, the Rule of 72 can
help you determine how long it may take before you receive a 100% return on your investment.
No matter what kind of investment you make,
the rule of 72 will benefit you as long as you also use the idea of compound interest.
For us to better understand this rule, let’s look at these following scenarios:
Investment #1: Savings deposit at 1% annual rate of return
Investment #2: Government bonds at 5% annual rate of return
Investment #3: Mutual funds at 8% annual rate of return
Investment #4: Stocks with a 12% annual return.
Now using the rule of 72, try calculating by yourself,
how long it will take for you to see returns on these investments. Write
your answers in the comments and tell me what pattern you can see.
Also, if you’re enjoying the video so far, do a huge favour and give this video a like.
Number 4. Inflation rate
You may be hearing on the news that there’s an inflation right now. But what does this actually
mean? An inflation rate is the rate at which prices tend to increase over a certain period of
time. Things like household goods and services, for example are affected by the inflation rate.
In simple terms: it costs more to buy the same thing you bought this time last year.
The rule of 72 helps us determine how long it will take us to beat inflation. If, for example,
inflation averages to 3% year after year, by doing the math we realise that the price will double
in the next 24 years. However, if the inflation rate stays at the current 6.8%, 72/6.8 gives us
10.6. So, in just a span of 10 years’ prices will astronomically rise! By using the rule, you can
financially plan ahead to stay ahead of the curve so that you are not beaten down by inflation.
Number 5. Savings
This rule has a lot of advantages, including when it comes to your savings, as it can enable you to
project when those savings will end up doubling. When it comes to keeping your savings, what is the
first place that you think of? Is it keeping your savings at home? Well, this is too risky and easy
to lose. Is it in the stock market? Well, this has a higher chance of growing your money, but also
with high chances of loss. Perhaps it’s opening a savings accounts with your local bank. If you're
lucky here, then you might make 1% interest on your savings account. And to be frank, this is
usually the lowest-hanging fruit. Setting a goal to save is good, and setting a budget to save is
a good idea as well. But, you should also know how long it'll take until you double your investment.
So now, let’s look at a few examples using the rule.
72 divided by the rate of return equals time for the investment to double. For example, let’s say
you have $1000 that you want to save in the bank. Let's also say that you’ll earn a 1% interest rate
every year. So, 72 divided by 1% = 72 years. That means if you put in $1000 today, you can expect
to have $2000 in 72 years! But I'm pretty sure you won't be around in 72 years to get a $1000 profit.
There are many investment programs out there that can guarantee a minimum interest rate
of at least 4%-7% per year! You just have to do some research,
sit down with a financial advisor, and they’ll show you much better routes you can take.
So, now let's use the same previous example: You still have the $1000, but you now put it
towards a savings program such as an index with an interest rate guarantee of 5% per year. So,
72 divided by 5 = 14.5 years. So, instead of waiting for 72 years,
it will only take you 15 years to double your investment with whatever amount you
put in. And it's safe! 5% is just an example. Realistic rates can be higher.
All in all, the rule of 72 is a handy dandy mathematical calculation you can use to identify
a number of things. This can mean seeing how long you’ll have to wait for your savings to
grow or how much money you’ll have to make to stay ahead of the inflation rates. Out of
all the things you can use this rule on, the one common thing we learn each time is to be patient.
Start your journey towards financial freedom today so that you don’t have to be patient for too long.
I hope you’ve learnt a lot from this video. Let me know in the comments how you aim to use this rule.
And with that being said, have a great day, and see you all in the next video!