I’m about to share with you the little secret of how the rich get richer and the poor stay poor.
And also a great way to wow your friends.
It’s called the “Rule of 72.”
I know, sounds boring.
But when you see its power it’s pretty cool.
Let’s say you’re 25. You have $20,000 saved.
You invest it and average 10% per year, the long term average of the stock market.
The “Rule of 72” says:
Divide 72 by your percentage return.
This tells you how many years it takes for your investment to double.
In this case, 72/10 = 7.2 years. Let’s round it off to 7.
So it takes 7 years to double your money.
So at 32 years old it grows to $40,000.
At 39, $80,000.
At 46, $160,000.
At 53, $320,000.
At 60, $640,000.
And at 67, $1,200,000.
You’re a millionaire.
Or you could have spent the $20,000 on a new BMW and said, “I’ll start saving later.”
If you started at 32 you’d have $640,000 at 67 rather than be a millionaire.
And the BMW long ago gone went to the scrap yard.
Second scenario, same starting point.
You want to be really safe.
So you put your $20,000 in the bank. Guaranteed. Insured.
Returning say 3%. Not bad.
The “Rule of 72” says your investment will double in value every 24 years. 72 divided by 3.
So now at 49 it’s worth $40,000. And at 73, $80,000.
So, though the rate of return was about a third, your total return was only a fraction.
That is the eighth wonder of the world. Compounding returns.
And the “Rule of 72”.
A cool little tool to calculate how rich you can grow.
The poor focus only on saving.
The rich focus on compounding.