Canadian Personal Finance Blog

Archive for the ‘Rule of 72’ Category

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

Einstein Rule of 72

This is a rewording of a previous 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 (approximately), so in 21 years (approximately) 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!!!

Taxes Coming

I keep having to remind myself of that one. I have my Quicktax installed and ready to go, but my current employer has a tradition of only sending out my T4 on February 33rd (or whenever the last day that they can is). I usually submit shortly thereafter, because my taxes are really not that complicated.I am proud to say that this year I do get to declare my income from blogging (it is a very small amount, but I am proud to say that I am a Minuscule Business now (the smallest of Businesses)). I figure for the amount of tax I have to pay, who really cares?

I plan on doing another essay on just how much my wife is worth (in the view of the CRA, not me, she is priceless to me (who would stay married to me for 20 years?)). My guess is not much more than last year, but if Mr. Flaherty does as he is thinking, and is not just teasing us, she’ll be worth a heck of a lot more!

This week in Carnivals

Blogging away Debt is hosting the 74th Carnival of Debt Reduction where she mentions my entry about whether to build up RRSP or pay down Debt.

The 87th Carnival of Personal Finance hosted by 2Million – My Journey to Financial Freedom included my discussions of Einstein’s Rule of 72  remembering, Einstein Finance.

Investment Strategy it’s Important

You are asking the wrong guy that question, I am not a financial investment guru, and any money I have made over the years has mostly been by accident, not by some grandiose investment strategy. When I was a younger man, I fooled myself into believing I knew what I was doing, but at the end of it, I didn’t (remember my comments about my tech investments here).

I would say that right now my investment strategy is to use index funds and slow growth bonds mostly, just because I am old enough now that I don’t think I can afford another massive hit like I did in 2000. Should you do this? Have you not been reading, I am saying, GO and find out what YOU should do, I am simply telling you what has worked for me.

Remember a few important points:

• The more the risk, the more the potential gains, but I am here to tell you that RISK sometimes is a bad thing too (remember Slim Pickens riding that h-bomb).
• If you are younger you can afford to take risks, because you have time on your side to recover, if you are older, you shouldn’t be risking money you can’t afford to lose.
• If you use Index Funds and/or Mutual Funds, research them well, and try to buy ones with low management fees, and no entry or exit fees. Don’t buy Mutual Funds solely on the say so of a co-worker or friend, research them, at your library or on line.
• If you are going to buy stocks, be careful, because no matter what stock you buy, you are at Risk. I have shares in Financial Institutions because they are making so darn much money, but if the housing BOOM turns into a BUST, these stocks are going to take a hit.

You have time if you are young, create an investment strategy but don’t fool yourself into procrastinating, remember:

If it weren’t for the last minute, I wouldn’t get anything done. ~Author Unknown

Is not the credo to live by in your financial planning and investing lives. –C8j

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, otherwise the concept of Einstein Finance might have taken off.

If you click on the calculator picture on the right you will find a PDF file 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 (approximately), so in 21 years (approximately) 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!!! Einstein Finance a new and exciting idea?

Einstein Finance

No, it is not E=MC^2, look at the mess that one has gotten us into.
I have read a bunch of places that Einstein was the first to quote the rule of 72. What is the rule of 72? OK, this one is really important for compound interest or growth, so pay particular attention to this one. If you have an investment M it and it is growing at a rate of G (compounded yearly) if you divide G into 72, that is how long it will take M to DOUBLE in value, hence Einstein Finance

Some examples:

• I buy a bond at 4% interest yearly growth (compounded), it will take 18 years for this bond to DOUBLE in value (i.e. 72 / 4 = 18 )
• I buy a bond at 2% interest and it will take 36 years for this to double in value.
• I leave my money in my bank account that pays 1% interest, it will take 72 years for it to double in value!

I don’t think I completely buy that Einstein thought this up, given that I have a math degree and this is just straight math, but let’s just say Einstein did say this, for now.

Find things that grow annually by 10% and your money will double every 7 years, which is really a good thing! Einstein Finance, a new concept!