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The Rule of 72. The Quick Math To Double Your Money!

The Rule of 72.  The Quick Math To Double Your Money!

Do you know how powerful the difference of one to three percent can be for your investment returns?  If you invest for over 30 years or more, the amount could be staggering.  As in a difference of $500,000 or more!  How crazy is that?

What I want to talk with you about today is the Rule of 72.  The main focus here will be to break it down, speak to you about how it can impact you from a few different angles, and then finish with how risk tolerance can affect your overall portfolio

The Rule Of 72

So, what is the Rule of 72?  The Rule of 72 was first written about by an Italian Friar by the name of Lucca Pacioli in 1494 in his book “Summa de arithmetica geometria, proporzioni et proporzionalita,”

The reason that this is important is the fact that he had created a rather simplistic way that wealth accumulates at a specific rate of interest.  If you can figure out this simple technique, you can figure out how many doubling periods you have left before you retire and approximately how much you can expect to have at that time.

Here is how the Rule of 72 works.

You start by taking the number 72. From there, you calculate what your average return is year over year. For many, we are shooting for a return of 6 to 8 percent on average. After you have figured out your personal average return, you will take 72 and divide it by your expected return. That number equates to the number of years it takes you to double your assets. Pretty cool, huh? And who told you math wasn’t fun.

Now, let’s take a look at an example so you can see how easy this is.

For example:

If you net an average return of 8 percent, you will look at it this way.

72 / 8 = 9 years.  You would double your assets every 9 years.

If you manage a 12% return, what would that be?

You probably guessed it. That means it would take 6 years to double.  

So why is this important?

Depending on your age, you can determine roughly how many doubling periods you have left in your lifetime.

The doubling period is precisely what the power of compounding article touches on.  But let us take a deeper dive into the way that this would work.

For a 20-year-old, you can see the following.

With a 6% average return, you would see that your investment would double every 12 years.  Suppose you retire at 67, which is the expected retirement age for social security now. In that case, that means you would have almost 4 doubling periods left. 

The one thing that this doesn’t take into consideration is if you are continually adding new assets to your investments.  If you are making monthly or annual contributions to your investments, that would be a different value altogether.  This assumes you have a lump sum already.

If you take that 6% return and are instead able to get 8%, you would have roughly 5.9 times to double your money.

If you manage to get 12% average returns, you would be looking at 7.8 doubling periods.  So, let us take a look at that in hard numbers.

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In the above example, we are assuming that you have 30 years before retirement.  This gives you the following set of doubling periods.

  • 6%  2.5 doubling periods
  • 8% is 3.33 doubling periods
  • 12% is 5 doubling periods

We can see that a 6% return can give you a pretty sizeable retirement given enough time.  At 12%, that same number becomes life-changing.  12% is not an easily attained return, year over year.  When you build out a balanced portfolio, you can consistently see a steady 6% to 8% return.

Now, I need to say that this is a shorthand way of calculating your future retirement amount.  Just remember that past returns are not a promise of future growth in the markets.  But as you can see, with a relatively small amount, and given time, you can see it grow into quite a large amount as you approach retirement.

This is the power of time and the power of compounding.  This is why you must start young, even if you only have a small amount to invest.  As you create more freedom fighters (investment dollars), you will see that your returns are doing more leg work than you are.  That is the position you want to be in.

Now, this changes a fair bit, depending on your age.  If you’re 50 and you haven’t started investing yet, that is okay too.  It just means to get to the retirement level that you want, you will have to sock away more than someone far younger than you. 

As you also get older, something that you need to look at is risk versus reward.  When you are young, you can assume far greater risk than when you are 65 and looking retirement dead in the eyes. 

So, what is risk tolerance?

For me, the easiest way to explain risk tolerance is this: If you had $100,000 invested in the market and lost $5,000 overnight, would you be scared?  Does the thought of losing any of it keep you awake at night?  That means you have a very low-risk tolerance.  

Maybe you’re the type of person that doesn’t care if they could lose it all so long as you have a chance to double or triple your initial investment.  There is no hard and fast rule here on what is right and what is wrong. 

You’re probably asking yourself, though, why am I bringing up the Rule of 72 alongside risk tolerance?  In truth, to get those types of returns, even at 6%, you need to take on a fair bit of risk. 

For someone who wants to avoid all risks, you would be lucky to get 0.6% on your returns right now in 2021.  If you would like to get more than that, it means you will need to lock up the investment for a fair bit of time.  Do you know how long that would take to double?

If you’re getting 0.6% on your money, it will take 120 years just to double once.  That is about one and a half times the human life expectancy right now. 

So if you want to make massive returns and create generational wealth for yourself and your family, you will need to put some money on the table and risk it.  The more you are willing to continually invest, the better off you could potentially be. 

Remember, there is no guarantee you’ll make money.  But the longer you have, with the higher risk tolerance in a properly allocated portfolio, the more likely you will see the steady returns you’re after.

Final Thoughts

The Rule of 72 is a tried and true way for you to quickly and effectively calculate an expected future amount based on a lump sum investment. I really love this tool when showing our kids the value of investing and how a small amount can grow into a large opportunity. Remember, take time to sit with your kids and teach them about the importance of finance because they aren’t learning it in school. Together, we can change their future.

Disclaimer: JustMyLittleMess does not provide tax, investment, or financial services and advice. The information is presented without considering the investment objectives, risk tolerance, or financial circumstances of any specific investor. It might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal.