The Rule of 72

[00:00:00] Welcome to Business Finance and Soul. My name is Shaun Enders and I'm a curious entrepreneur.

[00:00:07] I love exploring business, personal finance and consciousness. I'll jump around topics,

[00:00:13] offer my opinions and occasionally interview interesting people. Looking forward to going

[00:00:19] on this journey. Let's be curious together.

[00:00:30] Welcome back to Business Finance and Soul. I am talking today about the rule of 72 and why it's a secret weapon in your financial arsenal.

[00:00:41] So if you've ever found yourself kind of wishing for a crystal ball to predict your financial future,

[00:00:48] I think I have something that you can use.

[00:00:53] So it's kind of a hidden simple math rule is what it is. And the rule of 72 is kind of the closest thing really to a wizard spell for doubling your money.

[00:01:05] If you're familiar with the rule of 72 outstanding, it's really not a new creation, but many of us have never heard of it.

[00:01:13] It was actually if you trace it back, it goes all the way to the 1400s and credit is given to an Italian mathematician named Luca Paccioli.

[00:01:25] I think I've got that right. But some people actually attribute it to Einstein.

[00:01:30] But let's give let's give Luca credit back in the 1400s. But what is the rule of 72?

[00:01:37] So imagine you could just do quick math as to how close of timetable it will take to double your money.

[00:01:49] And that's the rule of 72. Here's how it works. You take the number 72, you divide it by the interest rate that you're expecting to earn.

[00:01:58] And the results is approximately how many years it will take you to really double your initial investment.

[00:02:08] So for example, if you invest in something with an 8% return, just divide 72 by eight.

[00:02:15] And in about nine years, your money will have doubled.

[00:02:19] And that's why saving your money simply isn't enough. You need to take into account the time in front of you and the interest that you need in order to get the results that are going to make your financial life work.

[00:02:40] So for instance, today, we're getting a solid 5% return on our money, right? Sitting in a savings account.

[00:02:50] Not all savings account, but if you're getting a high rate savings account like somewhere an M1 or maybe Betterment,

[00:03:04] you're getting that 5% which would take you about 14 and a half years to double your money.

[00:03:12] But imagine the savings rate a couple years ago at 0.5%. That would take you 144 years.

[00:03:19] That's a crazy difference. And then you can see the magic of compounding interest, what really happens when you take a difference of 0.5 to 5.

[00:03:31] Turns out that decimal point actually means a lot to you financially.

[00:03:35] You know, compounding interest is a fairy godmother to the finance world because it works quietly in the background.

[00:03:42] It really turns your initial investment into something that you can bank on for financial freedom.

[00:03:56] Simply put, it takes your interest on your interests and it can grow actually quite nicely over time.

[00:04:05] And so the rule of 72 uses this concept to give you a quick glimpse into the future of your investments.

[00:04:13] It's really like knowing when your train is going to arrive so you're not stuck kind of waiting on the platform.

[00:04:21] And this is why I'm such a huge advocate for starting early in your investment journey.

[00:04:27] You know, my nephew who is 21, we started talking about investing when he was 17 just turning 18.

[00:04:37] And you know, I wanted him to work backwards.

[00:04:40] You know, what was his financial freedom age?

[00:04:44] And going through what I'm about to go through shows you why I wanted to have this conversation with him so early.

[00:04:49] Because let's go through a quick calculation.

[00:04:53] You know, if you start with $10,000 at age 25, okay?

[00:04:59] So you've got a few years to start earning a little bit of money.

[00:05:02] You stash it aside.

[00:05:04] And if you average 9% return, which is just below the S&P average of 11% for the last 50 years,

[00:05:11] you would double your 10 to 20k in eight years.

[00:05:15] And at the age of 33, you double your 20 to 40 at age 41 and 40 to 80 by 49

[00:05:23] and then 80 to 160 by 57 and 160 to 320 by 65.

[00:05:29] Okay? So you're 65,000 or excuse me, 65 years old with 320,000.

[00:05:36] Not bad. You haven't invested anything else.

[00:05:39] But what if you had a goal of $1 million by the time you're 65?

[00:05:44] You just sometimes people just don't know how to get there.

[00:05:48] But they say, you know, I want to be a millionaire.

[00:05:51] Okay, well let's do the math.

[00:05:53] If you were able to save up $35,000 by the time you return 25.

[00:05:58] I know that's a big number, but it's very doable with the plan.

[00:06:02] Okay, now you know you've got five cycles at a 9% return to double your money,

[00:06:10] which without adding another dime would leave you with $1.1 million by the time you're 65.

[00:06:21] Starting at $35,000, ending with $1.1 million at a 9% average return, which is absolutely attainable.

[00:06:32] And you didn't put in another penny.

[00:06:35] You allowed time and that return to compound.

[00:06:40] I would just think of the power in that.

[00:06:43] So if you don't, if you wait until you are older, you're going to need a much bigger return,

[00:06:50] which means riskier investments.

[00:06:52] It means that you're going to have to swing for the fence or you're going to have to start with a big balance to get real traction.

[00:07:00] But that isn't something that I think a lot of us want to do.

[00:07:06] We would prefer to know this at an early age.

[00:07:09] This is why it's great to talk to our kids or talk to our nephews or nieces, just a younger generation so they can play the game at a different level.

[00:07:18] If you're older and you missed out on all of this, you didn't have this planning in place.

[00:07:24] That's okay.

[00:07:25] I mean, you do what you need to do for yourself at this time.

[00:07:28] We can't go back and change the past, but what we can do is pay it forward.

[00:07:32] We can talk about these things, get it out there and allow others to win in the financial game.

[00:07:39] So this rule doesn't have to apply to retirement only though.

[00:07:44] Now we can think of shorter cycles.

[00:07:46] We don't have to think of five cycles.

[00:07:48] You can think about saving for a car or a down payment on a house or an investment property.

[00:07:53] It's just a good idea to think about your money working for you.

[00:07:57] I mean, yes, it's great to save money.

[00:07:59] But the real goal in your financial life is for your money to work for you while you sleep.

[00:08:06] Saving your way to financial freedom, it just won't be enough.

[00:08:10] You know, my grandparents were not planners in the financial sense.

[00:08:13] My grandfather self admittedly retired too early and didn't do the proper calculations on how long he needed his money to last.

[00:08:21] He saved but he didn't invest.

[00:08:25] And that cost him in his later years.

[00:08:28] You know, they really had to make difficult choices because they outlived their retirement money.

[00:08:37] He just didn't do that calculation.

[00:08:39] I can't fault him though.

[00:08:40] You know, he grew up in a different era where he didn't fully trust or understand various investment vehicles.

[00:08:47] And frankly, he was scared of the stock market.

[00:08:50] And that makes sense.

[00:08:52] Different eras produce different results and different motivators.

[00:08:57] And it's not fair to look at a different generation and say, gosh, how did you miss this?

[00:09:04] I mean, our generation, you know, and future generations have the benefit of things like this, a podcast, YouTube,

[00:09:15] the internet to be able to, you know, type in our ideas or equations and, you know, our thoughts and our dreams and try to somehow gather other opinions relatively easily.

[00:09:27] But older generations really had to rely on their circle of influence or their steadfast belief in what they wanted to accomplish.

[00:09:36] And then they had to go out and really, really do the work to find it.

[00:09:40] So, you know, that's why I look at my grandfather and I go, he just grew up in a different era, but I can learn from him.

[00:09:48] I absolutely can take the lessons of his life and apply him to my own and then certainly from my life and his life and apply him to my kids and other kids that I like to mentor in this space.

[00:10:04] You know, how my grandfather looked at his options, really sat down with the timetable to grow his long term investments.

[00:10:12] He most certainly would have chosen a different path.

[00:10:15] For him, time just kept ticking by and eventually the future arrived and he wasn't prepared.

[00:10:22] But the thing is, as I interviewed my grandfather and my grandmother, and I asked them about that, you know, did they plan for the future?

[00:10:32] I'm fortunate enough to still have they both passed now, but I still have that recording and they really were the epitome of living in the moment.

[00:10:43] And that's beautiful.

[00:10:46] But had they really had anyone to push them to sit down when they were younger and walk through these types of scenarios, I can guarantee they wouldn't have pushed this away.

[00:10:58] They would have said, gosh, that's eye opening.

[00:11:01] And I need to take a closer look at this and I'm going to adjust the way I live, the way that I invest instead of just saving.

[00:11:10] You know, when you're thinking of things like the rule of 72, chances are you're exploring other aspects of your financial life.

[00:11:18] You know, you're taking into account economic changes and potential challenges.

[00:11:22] You think about the lifestyle you want your future self to experience and you think about your prime earning years, typically those range from, you know, your mid to late twenties to your mid fifties.

[00:11:35] And if you're one of those curious souls and I know that you are because you're listening to this podcast, you want to take full advantage of those years.

[00:11:45] Now, there are some limitations to the rule of 72.

[00:11:48] You know, you don't want to plan your entire financial life around this rule.

[00:11:53] It's a rough estimate, not an exact calculation.

[00:11:56] It's a bit like using a sundial instead of a stopwatch.

[00:12:00] It does get you the general sense of what you need to do and it's backup napkin math.

[00:12:08] But it's really, really great when you start looking at what investments you're interested in and the potential rates of return.

[00:12:18] Because if you have a goal to double your money and the rate of return just isn't there, it's not going to be there.

[00:12:24] You have to think about that.

[00:12:25] You have to say, well, you think about that pretty quickly.

[00:12:28] You know what?

[00:12:29] I'm not going to be able to achieve what I need to financially.

[00:12:32] Let me look at the next investment.

[00:12:36] You know, and like I always say, I'm not giving financial advice.

[00:12:43] You should always work with somebody that is either an advisor or somebody that is trusted in the space of knowing your personal financial situation.

[00:12:57] But I do encourage you to really take this information and apply it in your life.

[00:13:03] And everybody should know this rule.

[00:13:06] In the grand casino of life, the rule 72, it's like having a cheat sheet.

[00:13:11] It really helps you understand how your money can work for you and it empowers you to make smarter investment choices.

[00:13:17] That's all of it.

[00:13:19] That's it.

[00:13:20] It's really a piece of financial literacy that can pay dividends, literally and figuratively.

[00:13:26] So that's what I have for you today.

[00:13:29] The next time you're kind of pondering over your investments or your savings, remember the rule 72.

[00:13:34] It's a quick, easy way to get a handle on your financial future and share it.

[00:13:40] You know, if others are in the space of enjoying financial literacy and you know that they would benefit from the idea of the rule 72,

[00:13:54] or maybe they have no financial literacy and you know that they should be thinking of the rule of 72.

[00:14:01] Share this podcast with them and hopefully we bring more individuals into the movement of financial literacy,

[00:14:09] financial understanding and financial empowerment.

[00:14:12] Until next time, enjoy yourself and stay curious.