My mentor set his coffee mug on the table and said, “To help you make wise financial decisions, remember that money multiplies at a predictable rate whenever the return is constant.”
“What?!?” I asked almost spewing out a mouthful of coffee.
“Here’s a simple formula to help you plan how money multiplies,” he said with a smile. “Simply divide the rate of return into the number 72.”
“Can you give me an example?” I asked shaking the fog from my head.
“Sure,” he chuckled as our server filled his mug again. “Let’s say you paid yourself first this month and deposited five hundred dollars in an account at your financial institution. Let’s also say that it earns a ten percent annual rate of return. Simply divide seventy-two by ten and the quotient is seven with a remainder of two.”
I heard what he said, but wrote in my journal anyway. “It sounds like a magic number,” I said.
“There’s no mystery in determining how long it’ll take to achieve a financial goal,” He said. “I call it the rule of 72.”
I looked up from writing long division in my journal and said, “That’s amazing!”
He said with a smile, “It’s math, Chris.” We both laughed. Then he said, “What this means to you is the initial investment of five hundred dollars will become one thousand dollars in approximately seven years and a month if it earns a ten percent annual rate of return.”
“That sounds good to me!” I said urging him to continue.
“Continue this investment plan and reinvest the principle and the income it earns.”
“Okay,” I replied.
“Reinvesting the principle and its income is compounding. Compounding allows the investment plus the income it produces to earn more money.”
“Let’s make sure I’ve got this,” I said. “I paid myself first this month and deposited five hundred dollars in an account at my financial institution. If it earns a ten percent annual rate of return, then based on the rule of 72, my initial investment of five hundred dollars plus the earnings will become one thousand dollars in approximately seven years and a month.”
My smiled contently, “You’ve got it!”
Chris Bryant is an American financial advisor.