Financial Rules #2, The Rule of 72...Why it is important!

Now that we have budgeting down the 50/30/20 rule, let’s start talking about what we do with that 20% or possibly more that you are saving.  This is where things start to get interesting.

This is just a quick math rule designed to help you do compound interest calculations without all the detailed math behind it.  To be honest, I just use MS Excel’s FV calculation (=FV(Rate, Periods, PV) to do any of my math.  There was a time when I could do it with a calculator, but there is no need now.

The rule of 72 is simple: take the number 72 and divide it by your expected interest rate, and that is how long it is going to take for your money to double (assuming you do not touch it or add anything to it).  Sometimes you may hear this referred to as the rule of 7, since the S&P 500 typically returns 10% or more, 72/10 = 7.2, so in 7.2 years your investments will double.  Now, if you have that money in a high-yield interest account that is giving you a 5% return, it would take 72/5 = 14.4 years, or twice as long to double.

Overall, the calculation is pretty simple.  I tell people if you have $500,000 in retirement and do not touch it, in about 7 years it will be $1 million, another 7 years it will be $2 million, etc., etc.

Compound growth is a wonderful thing.  It starts off slow in your early years, but if you stay consistent over time, it starts to accelerate as it grows.  If you don’t believe me, I’ll give you some of my calculators, and you can see for yourself what 7 years at 10% can do for you.

Just to get you thinking, my calculator is showing me someone making $40,000 a year, investing 15% of that ($500/month, $6,000/yr) from the age of 22 to 52 will have $1,130,244 in the bank, NOW THAT IS SOME GROWTH. Just $6,000 per year, for 30 years, or a total investment of $180,000 only. If you took that down to $250 per month and $3,000 per year, in 40 years, you would have $1,581,020. It takes 7 more years to cross the million-dollar mark, but it is very possible!

Anyone can do this, but it takes discipline, time and consistency.