There is a very cool math rule called “The rule of 72” (Don’t judge- yes math can be cool!!). If you want to learn how to double your money, you should pay attention to it.
The rule of 72:
Basically, the amount of time it will take to double your money is 72/ annual rate of return.
So, if you are getting a 10% investment rate, it will take 7.2 years (72/10)
Only getting 4%? It will take 18 years to double your money (72/4)
Why should you care about your investment returns?
The rule of 72 can quickly show how small differences in return rates can make a massive wealth difference given enough time.
Say both you and a friend put $5000 aside when you are 20 years old (Read why you should start investing early). You never add another penny to it.
You get a 4% rate of return on average; your friend chooses low cost index funds and gets an 8% return. An extra 4% doesn’t sound like a big deal, right?
After one year, you have $5200 in savings and your friend has $5400.
Ok, they have $200 more than you. Not a huge deal.
But what if you forget about the money, and compare again when you’re 56 years old. Your money has had 36 years to grow. Now how much difference is there between you two?
Using the Rule of 72, your money would double every 18 years (72/4% rate of return). So after 36 years your money would double twice. You would have $20,000 (5000 x 2 x 2).
How is your friend doing? (This might hurt a bit)
Since they were getting an 8% return rate, their money doubles every 9 years (72/8). In 36 years, their money would double 4 times. Yep, they end up with $80,000! (5000 x 2 x 2 x 2 x 2).
You both put $5000 in savings at exactly the same time, and never added more. By earning just 4% more than you yearly, your friend finishes with $60,000 more!
Seemingly small differences in returns will lead to substantial differences in wealth over time.
The Rule of 72 shows you how to double your money; paying attention to your rate of return is up to you!
Many people take no care of their money till the come nearly to the end of it, and others do just the same with their time.-Johann Wolfgang von Goeth
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