The Rule of 72 and You

The Rule of 72, while simple, is one of the most powerful and motivating pieces of information to commit neurons to remembering. If you take nothing else away from my little blog, I hope you take this easy piece of math with you.

The Rule of 72 is a basic calculation for determining how long it takes an investment to double. All you have to do is divide 72 by the investment’s rate or return. If your investment is returning 12%, your investment doubles every 6 years: 72/12=6  It’s that easy.

To see how powerful 72 is, consider this example

I am 25 and have $10,000 to invest. I put it in the stock market where I expect it to return 10%, the historical average. The Rule of 72 how tells me how my investment will grow: 72/10 = 7. So, every 7 years, my investment will almost double. Let’s do some more easy math and see where this gets me down the road:

• 25 (starting point): $10,000
• 32: $19,500
• 39: $38,000
• 46: $74,000
• 53: $144,000
• 60: $281,000
• 67: $548,000

Incredible, isn’t it? No matter how many times I look at these numbers, they never cease to amaze.

Here is another example from my life

About 11 years ago, I needed a car. A friend was selling his old Honda. It had 130,000 miles on the clock, but I knew it had been well cared for and it was a solid runner. I picked it up for $2,500. At the same time, another friend was trying to convince me to buy a german import that would have cost around $40,000. That is what he was buying and since we made the same money, ‘why shouldn’t you have one too Mr. 1500?’

Fast forward to the present. I no longer have the beloved Honda. I got rid of it last year after the odometer turned 230,000. In that time, I spent about $1000 on repairs (rear brakes, exhaust and radiator). I loved the car and it still ran beautifully, but my wife and I had one car too many. I threw it on Craigslist.org and within an hour had sold it for $1700.

My friend with the german car no longer has his car either. I don’t know what his total expenditures were on it, but I know a cracked windshield alone ran him $800. Yikes.

However, the real power of this scenario shows itself when viewed in the context of the Rule of 72. His car cost roughly $37,000 more than mine. For the sake of simplicity, let’s just consider the initial price and not take into account his higher maintenance, insurance or fuel costs. Let’s assume I put that $37,000 into an account earning about 10%, the historical stock market average. I’ll use this nifty little calculator to run some calculations:

• 7 years later: At $72,103, my $37,000 has almost doubled. Wow.
• 10 years (current): I’m up to $95,968. At this point, neither of us own these cars anymore, but I have almost $100,000 more to show for it. For fun, let’s take it a bit further.
• 14 years: I’m now up to $140,507
• 21 years: Look! $273,809. Amazing if you want my humble opinion.

Those are some big numbers, all because I decided to have a less glamorous car for a short period of my life.

Every time you’re looking at a big purchase, you need to consider the Rule of 72. Tattoo it on your forearm if you have to. Look at the item you just picked up, then look at the tattoo and let it remind you how much its going to cost you. The rule of 72 will remind you that the real cost isn’t what you’re giving up to buy the item today, it’s how much of your future you’re giving up.

72! 72!! 72!!! 72!!!! 72!!!!!