One of the simplest tools to learn about accumulating wealth is the Rule of 72. Albert Einstein one of the smartest men of the modern era spoke of compounding interest as the eighth wonder of the world. It is the most powerful math equation thought of by man. Scores of large businesses tie their direct success to compounding interest such as banks and mortgage companies. Their business model was built on the premise of loaning money and making compounding interest payments as the loan is being repaid. Most Americans understand that’s how these businesses make money. However, they don’t seem to understand it can work the exact same for them. Let’s explore the Rule of 72.
The Rule of 72 was discovered by Albert Einstein and he considered it his greatest discovery even over E=MC2 (Squared). He considered it the most powerful force on earth. In its simplest form Einstein explained it this way. When you invest money, you earn interest on your capital. In the next year, you earn interest on your capital and the interest you earned the year before. Now this principle applies to any type of investment, debt repayment and the effects of the inflation rate on your buying power. By using Einstein’s Rule of 72 we can now fairly accurately determine how long it will take to double your money (or your debt) at a given interest rate. The rule is simple, divide the number 72 by the interest rate you are receiving (72/10=7.2), and you will find the number of years it will take to double your money. It is called the Rule of 72 because at 10% interest, the money will double every 7.2 years.
Let’s take an example of two investors at two different ages. “Bob” is a 20 year old investor of $1,000 per year and “Tom” is a 30 year old investor of $1,000 per year. For example purposes using our Rule of 72 let’s calculate our long term interest rate at 7.2%. This means both men’s money will double every 10 years which is fairly conservative. Let’s also state that “Bob” will invest $1,000 per year for only 10 years and stop contributing. “Tom” will contribute $1,000 per year for 40 years and stop. At age 70 both men want to use the money for retirement. “Tom” contributed $40,000 over his 40 years and his investment grew to over $240,000. However, “Bob” contributed $10,000 and his investment grew to over $273,000. “Bob’s” advantage of investing 10 years earlier than “Tom” allows his money to double one extra time and his investment out preformed “Tom” by almost 14% even though his contribution was 75% less. Take advantage of the Rule of 72 as young as you possibly can. There is no way to make up for the lost time of compounding. Had “Bob” contributed $1,000 for 40 years like “Tom” his investment at age 70 would have been a staggering $484,000!
Start saving today and take advantage of the Rule of 72. Just 5% of your weekly income invested over time will make a huge difference in how and when you retire someday. Download a FREE copy of the new eBook “The Minimum Wage Millionaire” for more free tips to saving and planning your future.
“…compound interest the eighth wonder of the world and mankind’s greatest invention because it is the mightiest force ever unleashed for the amassing of wealth” — Albert Einstein
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Tim Wilhoit is owner/principal of Your Friend 4 Life Insurance Agency in Nashville, TN. He is a family man, father of 3, entrepreneur, insurance agent, life insurance broker, salesman, sales trainer, recruiter, public speaker, blogger and team leader with over 27 years of experience in sales and marketing in the insurance and beverage industries.
Einstein is certainly a mathematical wizard-no one can argue that. The importance for planning your retirement cannot be overstated-the earlier the better! Thanks for sharing Tim
Anna, yes Einstein did have way of mathematically explaining things. I am glad you enjoyed it. Thank you.
Interesting article and makes a good point.
Franci, thank you for your kind words. I always value your opinion.
When did we forget this basic rule Tim, Thanks for sharing.
Ken, may be it all went with our lack of ethics and responsibility. When we became that “me first and gotta have it now” society.
I hope it doesn’t become integrated in the Majority as it won’t work in the long term. It will catch up to them
It is important to keep in mind that the “Rule of 72” is not exact but just a rough estimator based on annual compounding. The variance from that rule increases as the frequency of compounding per annum increases.
On the other hand, the rule is a fairly good guesstitool when the APR is used for the “interest rate”
Ami, as with any formula it will not fit every situation, but for the average hard working American who just needs a starting point. The Rule of 72 is a simple tool to gauge saving success by. Thank you for sharing.
HOLA YO ANDO BUSCANDO UN REPRESENTANTE PARA MI HIJO QUE ES CATEGORIA 1996 Y JUEGA DE ARQUERO EN LA 5TA. DIVISION DE ARSENAL DE SARANDI Y DE UN ARQUERO CATEGORIA 1993 EL CUAL HIZO TODAS LAS INFERIORES EN RIVER PLATE ARGENTINA Y COLON DE SANTA FE SI LE INTERESA vic_ale71@hotmail.com
it s a great rule!
Hello Tim, i have just finished reading your ebook,,,,,, Man its a great book,,,,,,,simple language……..clear vision……humane……..fits for new life recruits, experts, prospects and existing clients as well…….can be a tool for cross selling as well,,,,,,,Thanks Tim for wrapping things up……really THUMBS UP
Kamal, I can’t thank you enough for your kind words. I am glad you enjoyed my book and found it helpful. feel free to continue sharing it along with my blogs. I am grateful sir.
I’d like to share my presentation about the Rule of 72. http://www.authorstream.com/Edit/page/1/dgwilwayco-2158611-rule-72-v2014
Great job, Tim!
Thank you Duke, you are welcome to share your information on my blogs anytime.
Tim, good equation, and if I can add to that let me offer a similar deduction that I created 45 years ago for the small business owner, which over the past 45 years has become the loss art of business interest. Unlike Einstein, my physics are crated from an un-graduate street educated and survival of 23,000 successful business transactions. Equations even work in the world of small business when it is taught by my staff with more than a 90% success rating. With businesses failing on a high average, and will continue to slide down the none success slope, even when the slope is dry. So here goes, for all you none directed, lack of interest, and failure is just around the corner, for each one dollar you invest, should return you the ratio of 3 to 1 over a 4 year period. So if you invest lets say $300k with support and ongoing implementation, with the proper training, and the proper start-up formula these numbers will work. On a $300k investment your income should be greater than $150k a year, and the selling price of the business on the back side, and that should be the addition different income to reach the 3 to 1 ratio, return on investment. Tony Pezza CEO American Standard Businesses llc. .
Tony, that is a very interesting formula for small business owners and I am sure another great rule of thumb. The rule of 72 works with the employed as well as the self employed. I certainly appreciate you taking your time to share this with us. Impressive!
That’s a GREAT Rule! How about the “RULE of 100” that works real well!!
Samuel please share the Rule of 100 with us.
Rule of 100 is this: Man age 65 has 50 % of his Investments at RISK in Market and you want to show him that, this is too much. You use Rule of 100.
100 – age 65 = 35 that represents what % of his investments should be at RISK based upon his age and the time frame he has left to live. Plus he isn’t DCA anymore so his RISK is still very high because he has 50 % instead of 35 % in the Market.
Samuel, that is a very interesting tool. I like that and appreciate you sharing that with us.
Thank You!
The credit goes to my studies for my CFP from The College of Financial Planning in Denver
Great read
Great Article