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Rule of 72 Explained Simply - How Long to Double Our Money? - YouTube
Channel: Learn to Invest - Investors Grow
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hi i'm jimmy in this video we're going
to look quickly at the rule of 72
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the goal of this video is to help us
quickly be able to
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calculate either what interest rate we
may need
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in order for our investments to double
up or
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how long it will take for those
investments to double so how long will
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it take for us to double our money so
this is a fairly
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simple calculation and the video
shouldn't be too long at all
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but before we get into the calculation
itself i think we should really clarify
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the difference
between compound interest and simple
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interest
so let's imagine that we have ten
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thousand dollars and we say okay we're
gonna earn ten percent a year
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for the next ten years well ten percent
of ten thousand dollars
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is we could say okay that's a thousand
dollars a year ten years that's
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ten thousand dollars that we've earned
therefore in ten years we've doubled our
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money
but this is simple interest we know that
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it's simple interest
because the assumption here is that our
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one thousand dollars that we earn each
year
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isn't earning anything for us compound
interest on the other hand
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is when we assume that the interest that
we earn
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will then be reinvested and earn
interest for us so if it takes 10 years
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to double our money with simple interest
how long will it take to double our
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money with compound interest
well this is where the rule of 72 comes
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in and
it's really quite simple so we take 72
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and we divide that by our expected
return in our case
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we're saying 10 and we need to divide
this by the whole number
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so i know that 10 is actually 0.10
but we're just going to say 10. so 72
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divided by 10
tells us that it will take 7.2 years
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to double our money using compound
interest
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if we can earn 10 a year simple enough
so
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what if we earn 5 a year well 72 divided
by five
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and just like that we know that it takes
14 and a half years
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give or take to double our money
but what if we said hey i want to double
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our money
in five years what do we need how much
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do we need to earn to make that happen
well the rule 72 once again works for us
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so we take 72 we divide it by five which
represents the five years that we're
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looking to invest
and just like that we realize that we
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need to earn
14.4 percent to double our money in five
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years
now for all of the critics out there we
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might look at this and say
well it doesn't really work what if i
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wanted to double my money in one year
well 72 divided by one and we get
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72 percent and yes this is true
the rule of 72 is supposed to be a
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quick and dirty way to make calculations
and it's not nearly as effective on the
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extremes
so one years two years three years it's
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somewhat
weak but it's getting closer as the
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number of years increase
so with our five-year example well the
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exact math if we were to earn 14.4
percent
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for five years assuming we started with
ten thousand dollars
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well at the end of five years we would
have nineteen thousand
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five hundred ninety four dollars so not
exactly twenty thousand not exactly a
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double of our money
but fairly close considering how quick
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and simple the math is
and this is also true when we're
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calculating the number of years
so let's say we're going to earn 72
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percent well
72 divided by 72 is one year but as we
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know
we need 100 to double our money so we
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didn't in fact
double our money with 72 percent once
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again we have to stay away from the
extremes
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so if we stay with let's say reasonable
numbers
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then this shortcut could really serve us
well
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and i'm guessing that most of us want to
earn
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as high of a return as possible to help
us double our money
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faster and i think a lot of that comes
down to our ability
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to invest smartly and if we're going to
invest in individual companies
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i think we need to make sure that we
have a good understanding of that
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company
and i actually did a video where i go
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through the eight steps of analyzing a
stock
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and if you're curious perhaps that could
be a good next video for you to watch
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i've got a link right here i've got a
link in the description below and thank
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you so much for sticking with me all the
way to the end of the video
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i really appreciate it thanks and i'll
see in the next video
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