Welcome back. In this episode, we are going to address how to calculate the
rule of 72. Why is this important? Because this is one of the dynamic ways
to simply empower you to have double or triple the amount of money when you
understand how to employ the rule of 72 to be able to double your money every
7 to 10 years.
I'm Doug Andrew and I've helped many people for 45 years understand the rule
of 72. And how to use it for 2 particular calculations. But there's a
third one that I can even stumped many CPAs with. So, let's talk about what it is
and how it simplifies math and calculating rates of return or how long
it will take for you to double your money. It's an interesting phenomenon
where you can take any interest rate you're earning on your money and you
divide that interest rate into the number 72. And that will tell you how
many years it will take to double your money. So, let's say you're earning 8%
Interest. 8 into 72 is 9 times. So, your money
will double every 9 years. If you started out with 10,000, it'll double to
20. 20 doubles to 40. 40 doubles to 80. Every n9 years at 8% interest.
Well, if you're earning 9%, 9 into 72 means it will double every 8
years. If you're only earning 5% then it will take 14.4
years. Almost fifteen years to double your money. And so, if you work for
30 years, you're only doubling your money twice
during your whole working career if you're only earning 5%. What if you were
to earn 10% like I have for many, many years. 10 into 72 means your money will
double every 7.2 years. Are you getting it? It's sort of like the reciprocal of
that equation. I's also true. In other words, if you want to calculate the
compounded interest equivalent of a particular investment... Let's say that you
bought a piece of real estate and you paid $100,000 for it. Now, sometimes
people would come in to me and say, "I paid 100,000 for this piece
of property. And I just sold it and doubled my money." I go, "Huh,
well... I'm not that impressed until I know what?" 2 things. How long
did you hold on to it before you sold it for double. And did you pay cash? Did you
tie up all your money or did you use the third marble, leverage? Did you use OPM?
How much did you tie up? Now if you tied up all your money, you paid cash and you
sold it for double and I say, "How long?" Oh, I had it for 10 years. 10 years into 72
means that your real estate appreciated an average of 7.2%
per year. That's really not that impressive. Really. I mean, that's the
national average. Did you know that? So, you can take an interest rate divided
into 72 and it will tell you how long it will take to double your money. What if
you're earning 1% at the bank? 1 into 72? It will take you
72 years to double your money? Ah! I don't want to wait that long. So, that's pretty
pathetic. And if you're investing and you're doubling your money but it takes
you 15 or 20 years to sell something for double what you paid for it, that's not a
very good rate of return either. So how do you harness the power of this? You
want to be able to earn rates of return more like 6. 7, 8, 9, 10
percent and I prefer tax-free. Because if you're earning a 10% rate of
return but that is being taxed you're only really netting like 6 or 7.
You want to calculate it using the net internal rate of return. What is really
your money? I'm going to share with you another little question that I even
stumped CPAs with. So, in other episodes, I talk about the negative impact that
inflation has. When people retire, there are 2 things that sort of erode away
their retirement income or savings, taxes and inflation. So, let's talk about
inflation for a moment. How the cost of living goes up the price
of gallons of gas, loaves of bread, haircuts, whatever. So, let's say that
inflation averages 5%. And so, you're retiring and you think you can get by
with 3,000 bucks a month out of your tax deferred IRA or 401k to
supplement other income maybe a pension because you've taught school and your
Social Security. So, you go I think I can barely make it on 3,000 a month
coming out of that. If I take anymore, it's going to probably begin to deplete
that. And I don't want to outlive my money. Well, I ask CPAs. So, if you can get
by a 3,000 a month today and inflation average is 5%, using
the rule of 72... Calculate real fast. How much will you need to buy the same
gallons of gas and loaves of bread that you used to buy for $3,000
a month at 5% inflation if you live 30 years. And
they go... Now, "Say what?" At 5% inflation, how much will you need to have
an income to buy the same gallons of gas and loaves of bread that you buy 30
years ago for 3,000 a month? And they go, "I don't know. I need a calculator."
This is a rule of 72 equation. You ready? So, you take 5% inflation
divide that into 72, okay? That will go about 14.4. Let's just round it
into 15. That means every 15 years, the cost of living will double or
another way to look at it the purchasing power of that 3,000 is cut in half. In
other words, in less than 15 years you would need $6,000 a
month to buy the same gallons of gas, haircuts, golf green fees. The
$3,000 a month bought 15 years earlier. In another 15 years, it doesn't go up
another $3,000. It doubles again. You would need 12,000 a month to buy the
same goods and services that 3,000 bought just 30 years
earlier. So, if you're retiring at age 60-65 and one of you
will make it probably the age 95, that's the fastest growing segment of American
society today. Those people reaching over the age of 100. And if all of a sudden,
you retired thinking, "Well, I can get by on 3,000 a month. But that's about it."
You're going to need 12,000 a month to buy the same lifestyle that you used to get
for 3,000 a month. Unless you employ strategies to have an inflation to work
for you instead of against you. Which is another episode I would invite you to
view. But folks, you can use the rule of 72 to calculate the negative impact of
inflation and you must be rowing upstream at a rate of return greater
than the inflation rate. What does this mean? What if inflation goes to 7.2%
Actually it has. That means the cost of living would double every 10
years 7.2 into 72 is every 10 years. There are a lot of things that have gone
up in value more than 10%. Like health care costs. 10% inflation into 72, what
causes inflation? Irresponsible government spending and the printing of
money. If inflation averages 10%, 10 into 72 means every 7.2 years. You'll
need twice as much money to buy this same gallons of gas and loaves of bread
that it purchased just 7 years earlier. So, if you live 30 years, the cost
of living will double 4 times. So, what does this mean? It means that if you
understand how to harness the power of the rule of 72, it should become a
no-brainer to understand the Gauley to not outlive my money in retirement, I
need to earn predictable safe rates of return of probably at least 7.2%.
Maybe 10%. But the key is if you're earning those returns tax-free,
that's a huge benefit. And that's what I've learned through over 45 years being
a financial and tax strategist. I have predictably earned in
the worst decade since the Great Depression --2000 to 2010, I averaged
7.23% using indexing. A strategy that we teach in other episodes
and it happens to be the very strategy in my favorite vehicle called the laser
fund. But 7.23% means that any money I had in the year
2000, without adding a dime, I had 2 million, 10 years later most
Americans were just barely back to break-even. Let's see by using another
strategy that we teach, I'm able to earn more like 10%. 10 into 72
to means my money doubles every 7.2 years. What does this mean for
you? Let's say you have 500,000
right now... And by the way, it's not what you begin with it counts., it's what you end
up with. But you can extrapolate from this number. 500,000 if you
earn 7.2% will double every 10 years. At 10% about
every 7.2 years. This is why I helped many, many people with
500,000 double to a Million, double again to 2 million, double again to 4
million and the last seven point two years at doubled to 8 million in a
thirty year period. And 8 million earning 10% allows you to take
out as much as 800,000 a year without depleting your principle.
That is the power of understanding the rule of 72 for you. So, in review: What are
some big takeaways? How to use the rule of 72 to calculate how long it will take
to double your money. Also you can calculate the compounded interest
equivalent on any investment that you sell for double in a certain time period.
But also you can calculate the negative impact of inflation and how much you
will need more than the inflation rate to not outlive your money. I would
encourage you to now learn the power of compound interest because this is where
the rule of 72 comes into full play to you accumulate the most and not outlive
your money. Click on this episode and of course any of the links below will help
you learn even more in depth to various educational materials that I've prepared
for you.