Best of: Rule of 72

A quiet day so here is one of my favorite postings from this year.

Einstein Rule of 72


This is a rewording of a earlier posting on July 21st 2005. OK, so maybe I will concede that Einstein may have stated that this was important, but I am still not convinced he “invented” it, but be that as it may.

If you click on the graph on the right you will find a gif that will show you a graph to show you the rule of 72 at work. Assuming your saving a set amount of money with only 1 compounding period per year, this graph is fairly accurate.

The other thing to remember is this is a DOUBLING period, and the more of those the better. Why? Remember if you find an investment that grows say by 10% a year (over year), your money doubles in 7 years (about), so in 21 years (about) your money will be 8 times what it is today! (remember 2 * 2 * 2 == 8). This is why it is so crucial to find good growth in your investments.

HOWEVER, risk is another thing to take into consideration too, and we’ll talk about that soon as well.

Double, double, double!!!

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  • LifeInsuranceCanada.com May 18, 2013, 7:34 AM

    I used this with my kids recently, to show them the importance of starting to save early. At 7%, money doubles every 10 years, and returns on equities shouldn’t be far off 7%. Then I just showed them, take $10,000 like this:
    age 16: $10000
    age 26: 20000
    age 36: 40000
    age 46: 80000
    age 56: 160000
    age 66: 320000

    But when you start working, you won’t drop in $10K every 10 years, you will be dropping in $10K a year….and that gets you to $1MM at retirement. If you wait 10 years though, it’ll cut your retirement funds in half.

    Reply

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