This formula will change your life [Rule of 72]

in this video we're going to talk about the most powerful formula in finance in three lessons that we can take from it the formula is called the rule of 72. once you understand this concept for yourself it will change the way you view investing forever and it also is something that you can easily explain to someone else all you need is a piece of paper a pen and some basic math skills this video is for educational purposes only they should not be considered investment legal or tax advice it is not an offer to buy or sell any security cap performance does not indicate future results investing is received the rule of 72 tells you how long it takes to double your money at different rates of return so if I were to ask you what do you think you can earn on your Investments let's say you said well I think I can make seven percent per year the question is how long is it going to take you to double your money at a seven percent rate of return to find out you simply take 72 divided by seven percent which equals roughly 10. if you're able to increase your return to say nine percent that means now you're doubling your money once every eight years 72 divided by nine is eight so let's see how this works in practice let's assume that you make a nine percent rate of return long term on your Investments so your money doubles once every eight years so let's say that you're an enterprising young man or woman and you started investing early at the age of eight you put ten thousand dollars into the market or some other investment that earned you a nine percent return which according to the rule 72 means your money will double every eight years so we can just simply add eight a bunch of times so you have 16 24 32 all the way to let's say age 88. so each one of these represents a double so ten thousand doubles to twenty which doubles 240 160 320 640 1 0.28 million 2.56 million over 5 million and then at 88 this grows to 10 million two hundred and forty thousand dollars and all you needed to do for this to happen was two things one earn a nine percent annual return and two start at age eight the first lesson from the rule of 72 is to start early and you may not be eight years old but however old you are right now one thing's for sure and that is you're not getting younger don't let the regret of not starting at age eight prevent you from starting at age 48. now let's see what happens if we change the percentage that you're going to earn on your investments from nine percent which is the long-term growth rate of stocks down to three point six percent which is the current 10-year U.S treasury yield this yield simply represents what you could earn in a vehicle that basically lends money to to the U.S government for a period of 10 years you're guaranteed to get back 3.6 percent per year 100 guaranteed so if you take 72 divided by 3.6 we come up with 20. so at a 3.6 percent rate of return it will take 20 years to double your money so let's go back up and see how this compares to our nine percent so we're going to start at the exact same age only this time we're doubling every 20 years so 8 28 48 68 and 88 and we're still investing ten thousand dollars to start so 10 turns to 20 turns to 40 turns to 80 turns to 160. so the difference between a nine percent return and a 3.6 percent return with the exact same starting investment and the same starting age was 160 000 and 10.24 million the difference between nine percent and three point six percent is night and day so the rule of 72 tells us that if you want to build wealth you need to earn higher rates of return and the way you earn higher rates of return is by owning things which is lesson number two own things like businesses stocks real estate don't lend to other people so lending to the US government or lending to corporations in the form of bonds comes with higher quote unquote safety but the long-term compounding effect is substantially lower than earning higher rates of return and the difference between nine percent and three point six percent doesn't seem like all that much but the compounded effect is massive over 10 million dollar difference just by earning an extra roughly five percent annually the third and possibly most important lesson from the rule of 72 is is don't give up a lot of people get on their investing journey and they look at other people that have you know 500 000 or a million or 10 million and they look at their own portfolios and feel like they are small and they're not really making much progress on their Investments you know even if they're getting some percentage return per year it just doesn't seem to add up to much with this graph I think will change your mind let's plot out the actual numbers for this eight-year-old's portfolio he started at age eight and he invested ten thousand dollars which is pretty small right so let's put that on this chart here and we're going to say for each Notch here that represents a million dollars so 8 to 16 his little ten thousand dollar investment increased to twenty thousand twenty four it increased to forty thousand it's about there 32 grew to 80 which is maybe here 40 160 which is still here so if we just draw a line it's just barely kind of budging right it just looks like a pretty flat line but once he hits 48 you start to see a little bit of growth so 320 at 56 320 turn to 640 and then at 64. portfolio eclipses a million dollars at 72 it reaches two and a half million at 80. it's up to 5.1 and at 88 it is literally off our chart somewhere up here so now if we plot it you see this exponential growth in the portfolio the total investment gains for this entire 32-year period from age 8 to 40 was only a hundred and fifty thousand dollars so 32 years grew 150 000 but then the difference in just this eight year period alone was 5.12 million dollars so if you're watching this channel chances are you're probably somewhere in this realm so you've maybe been consistently saving or maybe you just started saving and your portfolio values are still pretty small you don't see a ton of progress but the lesson from the rule of 72 is that compound returns are exponential so continue to save continue to plow money away year after year after year and eventually you're going to start to see the power of compounding really start to take hold if you know someone that might benefit from this concept you can share this video or better yet go see them take out a piece of paper and show them yourself all you need to know is just a couple of calculations and you can very clearly show someone the power of the rule of 72 ultimately the power of compounding interest which Einstein called The Eighth Wonder of the world thanks to everyone who is supporting this channel via patreon and YouTube premium a reminder to those of you who have purchased my evaluation course I did post the dividend discount model example and I will be adding more content to that here in the next couple of weeks so I'll send you an email whenever that's available if you're interested in signing up I'll put a link in the description below thanks to everyone for watching and I will see you in the next video

Channel: Nathan Winklepleck, CFA

Views: 136,531

Keywords: stocks, stock market, investing, investing 101, investing 2022, how to invest 2022, how to pick stocks 2022, best stocks 2022, warren buffett, dividend investing, dividend investing 2022

Id: EmD7HBFzt7s

Length: 8min 21sec (501 seconds)

Published: Fri Dec 02 2022