What is the Rule of 72? And How Will It Help You Become Wealthy??

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“Derek, I’m in trouble. I’m 50 years old and we’ve only got $300,000 saved for retirement. There’s no way we can survive on that! It’ll only last us 10 years before it’s all gone!!”

I’m approached with the terror above quite a bit. People have been saving their entire lives, they hit the magic age of 50 where everyone seems to freak out a bit, and they suddenly look at their retirement account with extreme apprehension.

So how do they typically respond? One of two ways:

  1. They start investing much differently than they had before – in high-risk, high-reward stocks, or
  2. They keep their head down, stay the course, and just hope everything works out.

While I don’t love the “stick your head in the sand approach” of #2, it’s actually the option that I’d recommend (that is, if you’re invested appropriately for your age already).

The reason?

The Rule of 72.

What is the Rule of 72? And How Will It Help You Become Wealthy?

For many of us (you know, all of us non-app developing phenoms), it takes quite a long time to build wealth. By why is that?

It’s simple really.

It takes a while for compound interest to really show up and become noticeable. For the first 10-20 years, we don’t really realize that our money is growing exponentially, because we really haven’t saved that much! But, once it grows to a decent amount, the compound growth can be astounding!

Still not quite sure what I’m talking about? Check out the quick video below on the Legend of the Chessboard.

This video is a great lead-in to the “Rule of 72”.

The Rule of 72

The Rule of 72 is a quick way for anyone to figure out how quickly their money will double. Here’s the formula:

72 / (yearly interest rate) = # of years for your money to double

So, if you earn an average of 10% interest a year on a $10,000 investment, how long will it take for this money to double?

72 / (10) = 7.2 years

It will take 7.2 years for the $10,000 to turn into $20,000.

Pretty simple right?

what is the rule of 72How This Simple Math Will Save Your Retirement Account

Remember how we intro’d this article? One of my readers was freaking out because she and her hubby had only saved $300,000 so far in their retirement account. They were 50 years old.

But, in actuality, should they really be freaking out? The Rule of 72 will tell us.

Chances are, they plan to work until they’re 65 years old before they retire, which means that their money still has 15 more years to grow. Even if they didn’t put another cent into their retirement accounts, at 10% their money would double in 7.2 years, and then double again in the next 7.2 years.

So how much does their $300,000 become?

$1.2 million….

You know what? I think they’ll be okay, don’t you?

Use This Math to Estimate Your Future Wealth

Liz and I are 32 years old. Between our rental properties and our 401(k) investments, we earn an average of 12% interest each year. What if say, we have $200,000 invested? What will that turn into by the time we’re 68?

First, we apply the Rule of 72:

72 / 12 = 6 years

So if we did nothing more than keep our money invested in our two rental properties and in our 401(k), it would double every 6 years.

Second, we double the $200k starting from today until our proposed retirement age:

  • Age 32: $200k
  • Age 38: $400k
  • Age 44: $800k
  • Age 50: $1.6 million
  • Age 56: $3.2 million
  • Age 62: $6.4 million
  • Age 68: $12.8 million

Well sheesh…why the heck are we still working so hard?!! Based on the rule of 72 we’ll have $12.8 million dollars when we’re ready to retire! I think we could survive on that.

The reality is, nobody knows what the future holds. So, while we can still move and shake these young bodies of ours, we’re going to put them to work so we can have an amazing life and an even more amazing retirement! 🙂

So what about you? What does the Rule of 72 say about your retirement funds? How much do you think you’ll have?


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4 comments to What is the Rule of 72? And How Will It Help You Become Wealthy??

  • Nicole

    At this moment it looks like I will be over 1 million which is good but I sure would want to reach that before projected age of 67. I think once the house is paid for my numbers should improve. And working on staying healthy should be a part of this money thing too.

  • WTD

    I think it is dangerous for most people to assume a 10% return annually. In fact, historical norms are more like 6-7% percent. Surely, this has been a great ride in the last 10 years in the stock market but it is a bull market. What happens when we get into a 10 year flat or negative return market? Its not that easy.

    • The 10% was just an example. For me – with my paid-for real estate and solid mutual funds, I’m assuming 12%. For someone that knows nothing about what they’re doing and want to just invest along with the index, yeah, probably assume 7-8%.

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