In the investing world there’s a fun little principle called the “Rule of 72” that demonstrates why your rate of return matters so much when it comes to doubling your money.
Today I’m going to explain why this matters when it comes to building your wealth.
Now the rule of 72 is fairly simple and yet it represents a profound mathematical equation: when properly applied, it can determine how long it will take before your invested money will double in worth.
At its core, the number 72 can be divided by the expected rate of return (the percentage) to determine the number of years it will take to double an investment.
So, if you expect to earn a 6% return, then you divide 72 by 6 to get 12, which means it would take 12 years to double your investment at a 6% return.
Or if you think you will take a more conservative route and earn 4%, your money would double in 18 years. Clearly, the higher the rate of return, the sooner you double your money.
This is where the profound truth kicks in…
Let’s say you have $1,000 to invest and you are trying to think of the best way to get a high return while keeping your money safe.
Most people consider the ultra-risky investment to get rich quick or the ultra-conservative investment to keep your money safe.
But you’re not interested in going YOLO with your money on Dogecoin because you’re not 26 years old and living in your parent’s basement but you’re also not interested in putting it into a “high yield” savings account earning just 0.50%.
Let’s face it: with Dogecoin you’re afraid you’ll lose the entire amount and not have enough money to move out of your parents basement, and with the high yield savings, you’re afraid your money will never make much money and will just sit there (the price of ultimate safety).
You’re probably right on both accounts—by the way, it would take 144 years to double your money with the high yield savings account.
Seriously. 144 years.
Here’s where the savvy investing principles kick in. You might be thinking—should I invest the $1,000 in stocks?
The answer is NO and YES.
No – you should not invest your money in individual stocks (Subscribe to my YouTube channel to see my video on why this is a bad idea along with other videos on similar topics).
Yes – you should invest your money in stocks, but you should use a strategy that has been shown to earn a much higher rate of return than traditional investments. A rate of return on average of 12%
Based on the DIY investing strategies at the heart of the book The 12% Solution
by David Alan Carter – a strategy which involves one or two simple trades each month—your $1,000 could earn $120 in just 12 months.
(disclaimer—the book was written by my father)
Now let’s go back to the Rule of 72 and apply that 12 percent return. 72 divided by 12 is 6. That’s right, 6. It would only take six years to double your money using the 12 percent solution.
Which means that if you took that $1,000 and invested it in the strategy laid out in the 12 percent solution, by end of year one, you would have $1,120,
$1,250 by year two, $1400 by year three, $1,568 by year four,
$1756 by year five, and $2000 by year six.
And all you are doing is coming in once a month and making one or two trades.
Compare that to 12 years at 6 percent, or 18 years at 4 percent, or 144 years at 0.50 percent.
Your rate of return DOES MATTER – even just a percentage point can make a huge difference in terms of years. And we don’t want to wait years and years and years to see our money make money.
So, remember the Rule of 72 when it comes to your hard-earned money and why it matters where you invest it.
Thanks for reading and be sure to check out the video version of this blog post.