I felt it was necessary to write this article due to the very confusing information I'm reading on many websites in regards to the Rule of 72. There was a time I can remember being so confused as to the explanation some were giving. So I will give you the gist of it and elaborate from there. Remember too, this article is an easy way to understand the method. I could get super detailed if I wanted, but that is not the point of this article. So here we go.
The rule of 72 is a method of estimating how long it will take compounding interest to double an investment.
Double investment = 72 ÷ Annual interest
Say your investment yields 3% interest annually, sounds great right? Yay my money is growing! Hold on now. Let's calculate it.
72 ÷ 3 = 24 years to double your money.
Is that good? Well that depends on your, age, flow of income, goals, etc. Frankly 3% would be far too slow based on where I'm at in life. My financial advisor says 7 years is ideal. Anything less would be even better however keep in mind, the faster you gain money, the faster you can lose it. Anything longer would be slower than average.
Here is a Rule of 72 calculator.
Well there you have it. After thousands of other websites confusing people with a variety of numbers and calculations, there it is. Now to elaborate.
So why is this important for you? Well it'll help you calculate how much you'll have at retirement.
Some of you have your own Financial Advisor and I would highly recommend asking them, 'What is the annual return of interest on my investment?' When they give that to you, ask them how long it would take to double it since you now know how to calculate it yourself.
How many of you have ever called and spoke to your company's 401k administrator? You may or may not know this but you can modify your 401k to suit your needs. You can go moderate, moderate aggressive, aggressive and choose to add or take away some stocks or more.
Do you know exactly how much you'll have at retirement? Well you should. Majority of people in the USA won't have enough to retire on. It's a scary place to be.
I really don't like to dwell on the negative but considering the topic of discussion I would like to share what happens if you don't take charge of your balance sheet. By balance sheet I mean your current assets and your liabilities. Or to put in even simpler terms, what you own and what you owe. Here it is...
1) You may have to work until you die.
I see more and more of this every day and it breaks my heart. I met a sweet lady named Elaine who was 82 years old and working. Elaine and I got close, close enough to where I was able to ask her personal questions. Such as, Why aren't you retired yet? She said it was because her husband never made enough for retirement. Yikes! Poor Elaine had to get a job and was going to have to work until she died.
2) You may become a burden to your family.
This might be a bit tough to swallow for some of you, but it's the truth. If you don't have enough for retirement your children or other family members will have to take care of you. One thing great about family is they will for the most part, be there for you in times of need. But is that what you want? Wouldn't you rather have the peace of mind that you are financially well taken care of?
3) You give up the good life for a not so good life.
You may justify it to yourself and say, "well I can just sell the house and live in a smaller one or an apartment." How long will that last? Retirement shouldn't involve downsizing. Retirement should be a celebration after years of hard work. It's a time to upgrade, travel, and to buy that boat or house or whatever you've ever wanted. Everything until then should be the simple life. My financial advisor says to never wear, live, or drive your retirement. Meaning that at retirement is when you start to really live it up.
4) Retire with a few hundred bucks in the bank.
More than 50% of Americans have less than $10,000 in their retirement. This makes me incredibly sad. Saving for your future is incredibly important. As I've been working with clients over the years, I've seen too many accounts with only a few hundred bucks in it.
Some people may think that Social Security will be there for them, but no one truly knows what the economic status will be when we retire. Me personally, I am assuming that Social Security will no longer be in existent when I retire. If it is still around, that will be bonus money.
Using the rule of 72 puts you in a position of control and power. Remember: YOUR future, is YOUR responsibility.
The Rule of 72 is a balancing act. You need to time it right because the economy is always changing. It should be reviewed on a semiannual to annual basis. Take for example 2017. I have friends who doubled their money in a year (72 ÷ 60 = 1) only to lose a big chunk of their gains in February 2018 with the big drop in the market. So too fast might not be the best strategy.
Another thing you might try would be to try to keep pace with the market or beat it. But it isn't easy. Average returns on a bull market (market the trends upward; ideal market) is 20% roughly. That would mean doubling your money in 3.5 years. Sounds great but just remember it comes with risk. Your average market will return 10% annually. Hence the reason why most feel 7 years is a good average marker.
I like 5 years. What is my plan in achieving it? Diversification. Diversification is the method of dividing your investments so as to hedge against a declining market and capitalize on the gains of a rising market to make sure your portfolio continues to grow. I'll save diversification for another blog. So take control of your investments! If you do you'll have the satisfaction that only comes from financial freedom.
Hello and Welcome! Proluxx is a Finance, Budgeting, and Self Development blog. Our mission is to educate, motivate, and inspire as many individuals to gain financial peace and financial freedom through budgeting, investing, and side businesses. Hope you enjoy our content and leave a comment even if it is just to say hello!