Remember way back in 2006 when the best-selling self-help book, The Secret, burst onto the scene? At the time, I remember hearing a two-sentence summary of the book, and trying to decide whether to laugh or cry that people were taking it seriously.
If you’ve forgotten, the premise of the book was based on a half-baked idea called the “Law of Attraction,” which claims that a person can achieve their dreams simply through the power of their thoughts. More specifically, the LOA posits that if you just concentrate hard enough in the shiny material things you want, they’ll magically and effortlessly gravitate to you… somehow!
However, today I’m here to announce that, for the first time in human history, I know the REAL true secret to happiness, wealth, beauty, and ALL the shiny material things you could ever want. It’s just a simple, lowly math formula that–once you understand it–will revolutionize your life.
Ready to be blown away??
What is the Rule of 72?
First, let me explain what the Rule of 72 actually is. Basically, it’s simply a shortcut for calculating the time it takes to double your money in any investment. You simply take the annual percentage return of an investment and divide that number into 72, and the result is how long it will take to double your money.
Let’s run through a few examples:
- A stock earns 8% per year. If you divide eight into seventy-two, you get nine, which is the number of years until your investment doubles.
- A bond pays a 4% interest rate. Seventy-two divided by four equals twenty-four, which again is how long before the investment doubles. (I’m assuming the interest is reinvested at the same 4% rate.)
- A rental real estate project pays 6% after expenses, and the property is appreciating at 6% as well. The combined 12% rate-of-return means that you’ll double your money in only six years.
How the Rule of 72 Can Make You Rich
Obviously, I’m being little tongue-in-cheek here, but I do find myself using the Rule of 72 often. And, it has helped motivate me to focus more on saving and investing over the years. How? Well, let’s say you’ve managed to save $10,000 in your 401k or other retirement accounts. By investing aggressively, yet without taking on unnecessary risks, history says stocks should earn between 10-12% on average. Even if it’s only 9%, let’s say, over our remaining lifetimes, that means the $10k becomes $20k in 8 years.
Rolling that math forwards, then, in another 9 years you’d have $40k. And in another? $80k.
Over a 40-50 year career, you can expect about six “doublings,” which would bring your total nest egg to a whopping $640,000! Of course, that’s a hypothetical return, but it is reasonable at least based on what’s happened in the past.
More importantly, that doesn’t include any additional contributions, which could obviously amplify that figure tremendously.
How the Rule of 72 Can Make You Smart
Have you ever met a math prodigy? The human mind does amazing things every single day that we take for granted. Things the most sophisticated computers have struggled to accomplish, like drive a car, carry on a conversation, or tell a good joke. But somehow, we aren’t very good at all at doing math in our heads.
Well, most of us, that is. But occasionally the rare math prodigy comes along that can rival the greatest super computers in mathmatical prowess.
Check out this math boy-wonder below:
Unfortunately, most of weren’t born with the math skills of that remarkable boy, but the good news is we can fake it with simple tricks like the Rule of 72. So next time you’re at a dinner party, and someone remarks that 20 years ago they paid only half what their house is worth today, you can be the droll person that points out the sad fact that their return is “only” about 3% per year.
How the Rule of 72 Can Make You Wise
Obviously, knowing how money compounds tends to make you more on the future than the current moment. When you fully internalize how the math works, you’ll find yourself thinking twice for even the smallest of purchases. In fact, once you understand the Rule of 72, you’ll realize that time is your most valuable asset, and that your future financial freedom depends on every choice you make today, big or small.
In fact, if you assume historical rates of return on your investments, and a reasonable inflation rate (based on history), $100 spent instead of saved and invested could cost you almost 100 hours of your life–100 hours you could have been financially independent (aka “retired”).
This realization will motivate you to save, save, save! And a healthy savings rate is the number one way to make sure you get ahead financially. In fact, almost anyone can retire early if they combine a healthy savings rate with a smart investment plan.
How the Rule of 72 Can Make You Handsome
Well, we all know half of beauty is having the money to pay for it, amirite? Do I really need to write more?
Ok, ok–if you’re gonna twist my arm…
Check out this picture of international soccer star Wayne Rooney from back in the day.
Notice anything about his hairline? Well, ol’ Wazza was noticing too and wasn’t too fond of his receding locks. So, given his salary of around $15 million at the time, he decided he could fit hair transplant surgery into the budget.
And that’s what he did…
And, unlike most famous males who decide to go under the knife, Rooney openly admitted having the procedure, and good-naturedly endured the inevitable ribbing that accompanied it.
Was it all worth it? Well, it seems like it may have worked. At least it looks that way based on this recent pic…
But to some degree, it BETTER have, given how much it cost him. Most experts think his new mane cost around $20k-40k.
While this has been a playful take on the topic, the fact is the Rule of 72 is a very useful tool to have in your mental toolbox. It can help kickstart your savings and investing plan because while compounding interest is slow-moving at first, it clearly can make all the difference over the long-term.