How to Double Your Money Using The Rule of 72

Albert Einstein believed that the Rule of  72 was a more important discovery than his theory of relativity. The first reference  of this rule comes from Luca Pacioli who is regarded as the “Father of Accounting”. In  his 1494 book Summary of Arithmetic, Geometry, Proportions and Proportionality  (Summa de Arithmetic, Geometria, Proportiono et Proportionalita) he  explains the importance of this rule.

Being able to double your money in just a  few short years is literally everybody’s dream. How many times have you wished upon a  falling star that you’ll wake tomorrow with six figures in your bank account? Well, I’m  here to tell you that this is possible.

It is not a fantasy. In today’s Practical Wisdom  video, I’ll be talking about the Rule of 72. So, stay tuned and be ready to learn.

Also, get my free passive income guide  using the link in the descriptions. Number 1. The Rule of 72 The rule of 72 is applied while setting financial  objectives, when analysing economic trends, planning for financial goals, evaluating  investments and also helping you with debt.

The way it works is by determining how long  it will take for an investment to double while receiving a fixed interest rate. Here’s how you  calculate it: take 72 and divide it by the rate of return you hope to earn. For example, if you  plan on earning an interest of 5%, divide 72 by 5.

That gives you 14. 4. This is the number of  years it will take you to double your money.

There are many advantages to  this rule. You can, for example, quickly and simply determine whether you are  keeping up with the trends. Along with that, you can also ensure that you are on the right  track when it comes to your financial decisions.

It can also be used to calculate inflations  because it shows you how many years it will require for the value of the starting  sum to fall in half, rather than double. All this being said, using this rule also  comes with some disadvantages. For example, it can only be applied to assets which calculate  compound interest annually.

This rule also has some accuracy problems because it can’t calculate  rates below and above 6% and 10% respectively. Nonetheless, don’t let these disadvantages drive a wedge between you and the rule of 72.  Get a hold of a financial advisor who can thoroughly explain this rule in more  depth and can guide you appropriately.

Number 2. Compound interest As stated before, the rule of 72 only works  with compound interest. When you understand the rule and the power of compound interesting,  you have the secret recipe to financial growth.

Having also discussed the rule itself, let’s  talk about compound interest. The fantastic thing about it is that the longer your money is  invested, the greater your earnings will be. In other words, the interest earned on your initial  investments is added onto your initial investment, and this cycle keeps going.

Basically: invest  your money in it and then forget about it. Now, if you want to know how long it will take  to double your current savings, you’ll use the rule of 72. Take your interest rate, let’s  say 6% and divide it by 72.

72/6 gives us 12: this is how long it will take for you to double  your money. When it comes to compound interest, look for one where the interest rate is high  because the higher the interest rate, the quicker you’ll have your doubled amount. Get in  touch with a financial advisor, ask for the best compound interest and use the rule of 72 to see  just how quickly you can grow your bank balance.

Number 3. Investments The rule of 72 can also be used to evaluate your  investments. At some point in life, we all want to make investments, and you can definitely use this  rule to have a key insight on how long your money will take for it to double.

Therefore, if you  are considering investing, the Rule of 72 can help you determine how long it may take before  you receive a 100% return on your investment. No matter what kind of investment you make, the rule of 72 will benefit you as long as  you also use the idea of compound interest. For us to better understand this rule,  let’s look at these following scenarios: Investment #1: Savings deposit  at 1% annual rate of return Investment #2: Government bonds  at 5% annual rate of return Investment #3: Mutual funds  at 8% annual rate of return Investment #4: Stocks with a 12% annual return.

Now using the rule of 72,  try calculating by yourself, how long it will take for you to see  returns on these investments. Write your answers in the comments and  tell me what pattern you can see. Also, if you’re enjoying the video so far,  do a huge favour and give this video a like.

Number 4. Inflation rate You may be hearing on the news that there’s an  inflation right now. But what does this actually mean?

An inflation rate is the rate at which  prices tend to increase over a certain period of time. Things like household goods and services,  for example are affected by the inflation rate. In simple terms: it costs more to buy the  same thing you bought this time last year.

The rule of 72 helps us determine how long it  will take us to beat inflation. If, for example, inflation averages to 3% year after year, by doing  the math we realise that the price will double in the next 24 years. However, if the inflation  rate stays at the current 6.

8%, 72/6. 8 gives us 10. 6.

So, in just a span of 10 years’ prices will  astronomically rise! By using the rule, you can financially plan ahead to stay ahead of the curve  so that you are not beaten down by inflation. Number 5.

Savings This rule has a lot of advantages, including when  it comes to your savings, as it can enable you to project when those savings will end up doubling.  When it comes to keeping your savings, what is the first place that you think of? Is it keeping your  savings at home?

Well, this is too risky and easy to lose. Is it in the stock market? Well, this has  a higher chance of growing your money, but also with high chances of loss.

Perhaps it’s opening a  savings accounts with your local bank. If you're lucky here, then you might make 1% interest on  your savings account. And to be frank, this is usually the lowest-hanging fruit.

Setting a goal  to save is good, and setting a budget to save is a good idea as well. But, you should also know how  long it'll take until you double your investment. So now, let’s look at a few  examples using the rule.

72 divided by the rate of return equals time for  the investment to double. For example, let’s say you have $1000 that you want to save in the bank.  Let's also say that you’ll earn a 1% interest rate every year.

So, 72 divided by 1% = 72 years. That  means if you put in $1000 today, you can expect to have $2000 in 72 years! But I'm pretty sure you  won't be around in 72 years to get a $1000 profit.

There are many investment programs out there  that can guarantee a minimum interest rate of at least 4%-7% per year! You  just have to do some research, sit down with a financial advisor, and they’ll  show you much better routes you can take. So, now let's use the same previous example:  You still have the $1000, but you now put it towards a savings program such as an index with  an interest rate guarantee of 5% per year.

So, 72 divided by 5 = 14. 5 years. So,  instead of waiting for 72 years, it will only take you 15 years to double  your investment with whatever amount you put in.

And it's safe! 5% is just an  example. Realistic rates can be higher.

All in all, the rule of 72 is a handy dandy  mathematical calculation you can use to identify a number of things. This can mean seeing how  long you’ll have to wait for your savings to grow or how much money you’ll have to make  to stay ahead of the inflation rates. Out of all the things you can use this rule on, the one  common thing we learn each time is to be patient.

Start your journey towards financial freedom today  so that you don’t have to be patient for too long. I hope you’ve learnt a lot from this video. Let me  know in the comments how you aim to use this rule.

And with that being said, have a great  day, and see you all in the next video!