Are You Less Behind Than You Think?
By Kevin Estes
Feeling Discouraged
Some people feel discouraged with their finances.
However, it’s not all doom and gloom!
Let’s say someone is 40 years old and has $200,000 saved for retirement.
Here’s where the “rule” of 72 comes in handy.
“Rule” of 72
It’s a way to determine about how long it takes an investment to double, given an annual growth rate.
Here’s how it works:
Divide 72 by the annual growth percentage.
The result is about how many years it takes to double.
Exponential Growth
This is why saving early is so incredibly powerful.
However, exponential growth is notoriously difficult for us to get our heads wrapped around.
The “rule” of 72 helps us understand its power.
Guideline, Not Rule
However, the “rule” of 72 is more like a guideline than an actual rule. It’s a rough estimate and more accurate at 6-9% annual growth rates.
Consider an investment which had the great fortune to double in a year:
It didn’t take 0.72 years - that is, 72 / 100.
It took the whole year to double.
That’s almost a 39% error!
When It’s Most Accurate
The “rule” of 72’s error rate is lowest around 8% annual growth.
Above 19% annual growth, the error rate is over 5%.
Limitations
Like many financial heuristics, the “rule” of 72 has real limitations.
I find it best to take the time to model growth accurately.
If you’re interested in a review of your situation, please…
Disclaimer
In addition to the usual disclaimers, neither this post nor this video includes any financial, tax, or legal advice.
