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BizBasics: "The Rule of 72" with Peter Rodriguez - YouTube
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you
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hi here's a quick tip I use just about
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every day in countless situations it's
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simple it's versatile and it makes you
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look smarter without any hard work at
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all I love it I know you will too to see
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how to use it consider a common
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situation like this suppose that I know
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that I can earn interest on any of three
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potential investments Warren earns
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interest at four percent per year
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another earns at its six percent per
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year and another earns it at nine
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percent a year well I know that nine
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percent is higher than six are higher
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than four but to really make sense of
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the numbers I need to make the
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comparison of rates more relatable in
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real-world and one way for me to do that
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is to ask just how long would it take me
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to double my money under in either three
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options now without turning on Excel or
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opening up a calculator app I can tell
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you right away that my money will double
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in 18 years if I invest at four percent
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it'll double in twelve years if I invest
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it six percent and it will double in
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eight years if I invest at nine percent
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now right away I can see is the six
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percent rate doubles my money a full six
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years earlier than the four percent rate
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and that really helps me get a feel for
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the difference of the options in that
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field is really really important what's
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more I can handle just about any other
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rate of return quickly and compare them
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to any other options I have I'll give
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you another example suppose I had an
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option to invest in a secure investment
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and earn 3% interest per year or 4%
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interest per year
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that's a pretty low rate for both of
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them and you might think that small
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difference does it matter
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but let's go ahead and ask our doubling
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question again I can immediately do the
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math and tell you right away that my
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money will double in 18 years at the 4%
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rate and it will double in 24 years at
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the three percent rate it's a small
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difference in rates but it takes a full
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six years more to double my money at
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three percent than it does at four
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percent and that really helps make it
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clear that over a reasonable time
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horizon like saving for college or
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saving for your retirement paying
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attention to a 1% difference in rates
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really really matters so how do I do
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these quick calculations well you're in
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luck it couldn't be simpler
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it's just called the rule of 72 and it's
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a very easy way to approximate how long
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it takes to double something like the
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amount of money invested in a savings
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account under various rates of growth to
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use it all you do is you take the number
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72 and you divide it by the rate of
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growth the number you get is how many
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periods it takes to double your initial
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value
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so let's try another simple example
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consider an investment that earns 8% per
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year and ask yourself how long will it
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take to double my money at that rate
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easy just divide 72 by 8 and you get 9
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and that means it'll take nine years to
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double my money how about a rate like
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12% per year easy again just divide 72
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by 12 and you get the number six which
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means it will take six years to double
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my money at a 12 percent annual rate of
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return now once you get a feel for it
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you can use the rule of 72 in a whole
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host of ways be creative for example you
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can use the rule in Reverse and ask at
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what rate would something have to grow
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in order for it to double in value in a
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fixed period of time so suppose someone
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said hey would be great if we could
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double our businesses Twitter followers
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in 18 months easy again 72 divided by 18
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is 4 and instantly I know that if I grew
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my Twitter followers at 4 percent per
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month my number of Twitter followers
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would double in 18 months or how about
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this I have a child born today and want
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to save money for them to go to college
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in 18 years I know that if I invest ten
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thousand dollars a day in turn four
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percent is a rate of return I'll have 20
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thousand dollars when they turn 18 and
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get ready to go to college and if I
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could get a rate of return like 8
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percent per year I know that if I invest
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ten thousand dollars today I'll have 20
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thousand dollars in 9 years and 20 more
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thousand dollars nine years after that
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or 40 thousand dollars when they go to
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college 72 is great because almost
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everything divides into it an intuitive
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way 2 3 4 6 8 9 12 makes it very easy to
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use you can even do a little more work
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and see that a number like 5 divides
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into 72 14.4 times and 7 divides into 72
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10.3 times and you've got just about
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every number Under the Sun you ever work
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the rule of 72 offers a quick useful and
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a very close approximation so don't
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delay get started now use the rule of 72
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in all the ways you can think of and I
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promise it will make you think faster
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think better and look smarter every time
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you use it
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you
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