The Golden Rule Of 72

“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” – Attributed to Albert Einstein, Baron Rothschild, and others

In 1956, 26-year-old investing legend Warren Buffett returned to hometown Omaha from New York to start an investment fund. He went door to door, calling on his father’s friends. Seeing his threadbare suit and shirt frayed at the cuffs, prospects despaired. But this was Omaha and their friend’s son, so they listened politely. Buffett began by explaining the Rule of 72.

What? That’s right. He didn’t deploy arcane financial jargon, boast of his New York experience, or regale with promises of wealth. Instead, he started with a math concept requiring only division. And those who listened and invested became the now-famous Omaha Buffett millionaires.

Message? To grow wealth, start with the Rule of 72. Here’s how it works.

If I hand someone $1,000 and ask how long it takes to double if invested at 10% annual interest, most people answer, “ten years.” Right?

Not at all. It’s not 10 years, but 7.2 years. At 5% interest, not 20 years, but 14.4. Divide 72 by an interest rate to know how many years it takes money to double at that rate. Or, divide 72 by the number of years in which you want to double money to learn what interest rate you will need. At 9%, your $1,000 doubles in 8 years (72 divided by 9). To double money in 12 years, you need 6% annual interest is required (72 divided by 12).

How can this be? Compound interest. (See, Einstein.) Your money earns 10% in year one, that’s $1,100. Then, 10% on the $1,100 is $110, giving you $1,210 at the end of year two. After three years, $1,331, four $1,461, then $1,611, $1,772, and $1,949, with the rest coming in 0.2 years for $2,000. Your money has doubled in 7.2 years, hence the Rule of 72.

It gets better. The $2,000 takes another 7.2 years to double, but the original $1,000 triples to $3,000 during the 12th year, $4,000 in the 15th, 5,000 in the 17th and keeps on accelerating. Your money is wet snow rolling down a hill. The longer the hill, the larger the snowball, the more your money grows. So don’t wait.

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