By Kevin Estes

How to Build Wealth

Many people want to get rich now.

That leads them to:

• invest in risky opportunities

• launch business after business

• buy lottery tickets

That’s not (usually) how wealth is built.

Want to know the secret?

Time.

Average Billionaire is 66

According to Forbes:

The average billionaire is 66.

Every billionaire under 30 inherited his or her fortune.

Young heirs lower the average. Self-made billionaires are even older.

“Rule” of 72

The “rule” of 72 is a quick way to estimate about how long it takes an investment to double.

Simply divide 72 by the annual growth percentage as a whole number:

• 4% annual growth doubles in about 18 years (72 / 4)

• 6% annual growth doubles in about 12 years (72 / 6)

• 8% annual growth doubles in about 9 years (72 / 8)

• 12% annual growth doubles in about 6 years (72 / 12)

“Rule” of 72 Error

However, the “rule” of 72 is more like a guideline. It’s imprecise and most accurate at 6-9% annual growth rates.

For more check out: Are You Less Behind Than You Think?

Growth Example

Let’s assume someone who’s 30 years old has saved and invested diligently. They have a Roth IRA worth $200,000.

That’s helpful because they might not need to:

• pay taxes or

• take Required Minimum Distributions.

They’re also fortunate in that they:

• don’t need this money,

• earn a 7.2% annual return, and

• live to 90 years old.

Napkin Math

Using the “Rule” of 72, their funds would double about every decade:

• $200,000 at age 30

• $400,000 at age 40

• $800,000 at age 50

• $1.6 million at age 60

• $3.2 million at age 70

• $6.4 million at age 80

• $12.8 million at age 90

More Precise

Due to the “rule” of 72’s error, the actual values could be a little higher:

After Inflation

Inflation could erode the purchasing power. As long the growth rate is bigger than inflation, the real value will grow well above $200,000.

Let’s assume inflation will be 2.54% a year.

With 7.2% nominal annual growth and 2.54% inflation, the real annual return would be about 4.55% (1.072 / 1.0254 - 1).

In today’s dollars, it would grow to:

That’s almost $3 million in today’s dollars. It’s nearly 15 times the $200,000 today!

Power of Compounding

Warren Buffett’s long-time business partner Charlie Munger said:

The first rule of compounding is to never interrupt it unnecessarily.

Starting early gives investments longer to grow.

Let’s review a made-up example.

Nick

• Nick saved $10,000 a year from age 22 until age 31 (10 years).

• He hasn’t withdrawn funds

• His investments earned a 7% annual return

Nate

• Nate saved $10,000 a year from age 32 until age 67 (36 years)

• He also hasn’t withdrawn funds

• His investments also earned a 7% annual return

Who Has More

Nick contributed $100,000 ($10,000 a year for 10 years).

Nate contributed $360,000 ($10,000 a year for 36 years).

However, Nick has more at age 67!

• Nick: $1,688,870

• Nate: $1,593,374

Despite contributing nearly four times as much and only starting a decade later, Nate has less than Nick.

Here’s a graph of how their portfolios might have grown over time:

When’s the best time to plan a tree? 30 years ago.

The second best? Today.

I hope this helps!

If you’re interested in a review of your specific situation…

Disclaimer

In addition to the usual disclaimers, neither this post nor these images include any financial, tax, or legal advice.