One of the simplest tools to learn about accumulating wealth is the Rule of 72. Albert Einstein one of the smartest men of the modern era spoke of compounding interest as the eighth wonder of the world. It is the most powerful math equation thought of by man. Scores of large businesses tie their direct success to compounding interest such as banks and mortgage companies. Their business model was built on the premise of loaning money and making compounding interest payments as the loan is being repaid. Most Americans understand that’s how these businesses make money. However, they don’t seem to understand it can work the exact same for them. Let’s explore the Rule of 72.
The Rule of 72 was discovered by Albert Einstein and he considered it his greatest discovery even over E=MC2 (Squared). He considered it the most powerful force on earth. In its simplest form Einstein explained it this way. When you invest money, you earn interest on your capital. In the next year, you earn interest on your capital and the interest you earned the year before. Now this principle applies to any type of investment, debt repayment and the effects of the inflation rate on your buying power. By using Einstein’s Rule of 72 we can now fairly accurately determine how long it will take to double your money (or your debt) at a given interest rate. The rule is simple, divide the number 72 by the interest rate you are receiving (72/10=7.2), and you will find the number of years it will take to double your money. It is called the Rule of 72 because at 10% interest, the money will double every 7.2 years.
Let’s take an example of two investors at two different ages. “Bob” is a 20 year old investor of $1,000 per year and “Tom” is a 30 year old investor of $1,000 per year. For example purposes using our Rule of 72 let’s calculate our long term interest rate at 7.2%. This means both men’s money will double every 10 years which is fairly conservative. Let’s also state that “Bob” will invest $1,000 per year for only 10 years and stop contributing. “Tom” will contribute $1,000 per year for 40 years and stop. At age 70 both men want to use the money for retirement. “Tom” contributed $40,000 over his 40 years and his investment grew to over $240,000. However, “Bob” contributed $10,000 and his investment grew to over $273,000. “Bob’s” advantage of investing 10 years earlier than “Tom” allows his money to double one extra time and his investment out preformed “Tom” by almost 14% even though his contribution was 75% less. Take advantage of the Rule of 72 as young as you possibly can. There is no way to make up for the lost time of compounding. Had “Bob” contributed $1,000 for 40 years like “Tom” his investment at age 70 would have been a staggering $484,000!
Start saving today and take advantage of the Rule of 72. Just 5% of your weekly income invested over time will make a huge difference in how and when you retire someday. Download a FREE copy of the new eBook “The Minimum Wage Millionaire” for more free tips to saving and planning your future.
“…compound interest the eighth wonder of the world and mankind’s greatest invention because it is the mightiest force ever unleashed for the amassing of wealth” — Albert Einstein
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Tim Wilhoit is owner/principal of Your Friend 4 Life Insurance Agency in Nashville, TN. He is a family man, father of 3, entrepreneur, insurance agent, life insurance broker, salesman, sales trainer, recruiter, public speaker, blogger and team leader with over 27 years of experience in sales and marketing in the insurance and beverage industries.