Rule of 72

This is a great trick I have learned along with investing and you can apply it to your own investments now and in the future.

The Rule of 72 is a great financial tool and shortcut to estimate the effect of any growth rate or how compound interest can help you or hurt you. 

Here’s the formula:

• Years to double your cash = 72 / Interest Rate You Earn Now
• Interest Rate You Need To Earn = 72 / Years to double your cash

This formula is useful for financial estimates and understanding the nature of compound interest.

Examples:

• At 3% interest, your money takes 72/3 or 24 years to double.
• To double your money in 6 years, get an interest rate of 72/6 or 12%.

You can also use the rule of 72 for expenses like inflation or college tuition:

• If inflation rates are 3%, your money will lose half its value in 24 years.  (SCARY!!)  (So you need to earn way more than 3% just to keep up!!)
• If college tuition increases at 5.5% per year (which is faster than inflation), tuition costs will double in 72/5.5 or about 13.1 years!! Which if you have kids now that is any easy calculation for you to understand that you have to make a lot of money if you want your kids to go to college.  I have a 4 year old and a 1 year old as I write this.

The rule of 72 shows why a “small” 1% difference in inflation or expenses has a huge effect on you (positively or negatively)

The questions to ask yourself: are your investments going in the right direction?  Are your investments consistently beating inflation?  If they are not then you need to act now to make enough in order to retire when you want.

For example - if your investments on average have been making 5 to 8% (which a financial advisor at some large company thinks is a good rate) you need to ask yourself, are you getting to your retirement goals fast enough (including inflation)?  My guess is you are not.  You really need to be making well over 8% (on average) to be reaching your retirement goals.  I am no financial advisor but do you think your investments, on average, have been giving you returns of 8% or more per year this last decade?  I can probably guess NOT.

Even if you don’t invest with us you need to take action now.  Use the Rule of 72 to your advantage.  Time is on your side if you do something now.  Don’t wait and be working at Wal-Mart or the Supermarket because your investments didn’t give you the return you needed.

We consistently have opportunities for people at not just 8% but at 12% fixed (not variable) interest secured by a deed of trust on a house (so there is security).  And many people are lending directly from their IRA, 401k or pension plan. 

We have several happy lifetime customers who will be with us forever.  If you have any questions on how to lend from your IRA or 401(k) you can visit the Self Directed IRA custodian that we use personally at http://newdirectionira.com.  Another highly recommended Self Directed IRA company is http://www.trustetc.com or you can just contact us directly and we will point you in the right direction.

We are always here to help.

Good luck in 2010!
Kevin