Monday, August 4, 2014

The Rule of 72

Every field of endeavor has a certain number of rules or guidelines, formulas, or just things about which the real experts know.  Accountants know the benefits of a 1031 Tax Deferred Exchange.  Joiners and carpenters know the formulas for building staircases.  Every estate planning attorney knows what is meant by durable powers of attorney and life estates, and should be able to explain them simply to his or her clients.

As a person who sells homes and real estate investments for a living, my humble opinion is that everyone who deals with money on any level should know the Rule of 72.  Ask around.  Nobody knows the Rule of 72.

When you are just thinking in broad terms about investments, retirement planning, home values or savings accounts, this one comes in handy.  It’s certainly not a precision instrument, and everyone should always seek the advice of a competent professional in any investment or financial planning situation, but for brainstorming and big picture thinking, it comes in handy.

Ask yourself this question:  How long will it take to double my money?  If I put $1000 in a savings account and just leave it alone, how long will I wait for it to become $2000?  If I buy a $500,000 real estate investment and maintain it respectfully, when will it be worth $1,000,000?  If I set aside $5000 every year for my retirement, how many years go by before each of those $5000 inputs will be worth twice that?

When you ask those kinds of questions, you put yourself on the path to planning your financial future.  Conversations with yourself that ask these kinds of questions are important.  Have these conversations with yourself privately, so as not to worry those around you, but have them.

The Rule of 72 gives you the answers.  Here’s how it works.

Multiply any two numbers to get 72, or even very close to 72.  1 x 72.  2 x 36.  3 x 24.  4 x 18.  5 x a bit less than 14-1/2.  6 x 12.  7 x a little more than 10, etc., etc.

Now use these numbers to answer your questions.  If I put $1000 into a savings account at 1% interest, and leave it alone for 72 years, I’ll have $2000, because 1 x 72 = 72..  If I buy a $500,000 home and maintain it, and the real estate market shows an average yearly increase of 4% in value, the property will be worth $1,000,000 in about 18 years, because 4 x 18 = 72.  If you invest $5000 today in a solid mutual fund portfolio for your retirement, and you are able to manage a consistent 6% return, you’ll double that money in about 12 years, because 6 x 12 = 72.  If you pay $5000 for Iraqi dinars on the low, and the Iraqi economy turns around dramatically, and over 7 years increases yearly in value on an average of 10-11%, you’ll have about $10,000 when you sell them at that time, because 7 x 10 or 11 = about 72.

When two numbers multiplied together equal 72, and one of those two numbers represents your return on your investment each year, the other is your time in number of years to doubling your value.

How much money do your need to retire?  How much of a return can you get on your investments?  Use the Rule of 72, and on the off chance that you actually do make the return consistently that you expect, you can realize the fruits of your planning.

And if you’re wondering, you can buy about $100,000 in Iraqi dinars for about $100 today.  Financial advisors will tell you that for most people, buying a home is a better bet.

For your real estate needs, call me as you need.   I’m always here for you.

Enjoy the day,
303.541.1920 office