Last week was the kickoff and the introduction. Now, it’s time we go to work.
There is a simple rule not being taught in schools. Banks and insurance companies aren’t teaching it either. But why would they teach you the rules of the game? If you don’t know the rules, how do you expect to win? What incentive do banks and insurance companies have in teaching you the rules? If you know the rules, then you may not rely on banks and insurance companies to grow your money.
Have you ever heard of the Rule of 72? If you haven’t, don’t feel bad. Many people haven’t, by design.
The Rule of 72 is simple, but powerful. It simply states that if you take the interest your money is earning, and divide that number into 72, the result is the approximate number of years it will take your money to double.
72 / % = approximate years it takes the amount to double
So let’s say at your birth, your grandparents gave your parents $10,000 and said, “Put this money away and save it for my grandbaby.” If your parents saved it in a bank at 1%, when you turn 72 years of age, you would have $20,000. That’s it.
72 / 1 = 72 years for $10,000 to double to $20,000. Not much you can do with that at 72.
If your parents saved it in a CD at 3%, at the age of 48, you would have $40,000. It’s a little better, but with inflation at 3.5%, you would lose purchasing power, and the $40,000 wouldn’t do much to change your life.
72 / 3 = 24 years, so $10K would be $20K at 24 years of age, and $40K at 48 years of age.
Now, let’s look at a balanced mutual fund your parents decided to invest the $10,000 in at your birth, and it average 6%. At the age of 48, you would have $160K. That’s better and beats inflation, but you can’t retire with that amount.
72 / 6 = 12 years, so $10K would be $20K at 12 years of age, $40K at 24 years of age, $80K at 36 years of age, and $160K at 48 years of age.
But what if your parents knew about investing and chose a great mutual fund that averaged 12%? Can you believe that at the age of 48, you would have $2.56 MILLION?!? Could you retire with that?
72 / 12 = 6 years, so $10K would be $20K at 6 years of age, $40K at 12 years of age, $80K at 18 years of age, $160K at 24 years of age, $320K at 30 years of age, $640K at 36 years of age, $1.28M at 42 years of age, and $2.56M at 48 years of age.
So, how important is The Rule of 72? I would argue to say that knowing this rule and the power of compound interest is one of the most powerful pieces of knowledge that we should teach in our families. This is how you change generational wealth and leave an inheritance to your children’s children.
Did you know that $100/month invested at 12% for 40 years is $1.2 MILLION? That’s $48,000 invested, and $1.15M in interest gained!
Stop settling for less than 1% on your savings and losing purchasing power. Start investing your money in the same places you spend your money – the global economy.
The bank does not let your money sit in a box with your name at 1%. They move it to the global economy in the investment department, the credit card department, the mortgage department, and the loan department, and make 10% or better.
You should do the same.
Market Insights
- Stocks advanced last week as investors moved past Middle East peace talks that made no progress and focused on corporate earnings reports.
- The S&P500 rose 0.91%, the Nasdaq rose 1.12%, and the DJIA rose 0.55%.
- April was the best month in five years for the S&P500 and the Nasdaq.
- The Feds held interest rates where they are, but it was not a unanimous decision (8-4). Jerome Powell also announced he will be staying on as a governor after his role as chairman expires.
Thought for the Week:
Judge and political philosopher Montesquieu on happiness:
“If you only wished to be happy, this could be easily accomplished; but we wish to be happier than other people, and this is always difficult, for we believe others to be happier than they are.”
Source: Mes Pensées
About The Author
Frederick Hogsett, Jr. is a licensed financial coach with almost 30 years of experience helping individuals, families, small businesses, and nonprofit organizations. He recently opened an office in Savannah, Georgia, and can be reached at (803) 463-2773 or by website at www.livemore.net/fhogsettjrclient.
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