Chapter 7: The Rule of 72 – Wealth Building's Secret Formula

Andy Horner  •  11/18/2014  •  Feature Presentation

In college, I followed in the footsteps of my dad, a CPA, by getting my degree in accounting and looked forward to a career in that industry. Like him, if I proved myself, I might one day be promoted from employee to partner. And like him, I might reach an earning ceiling that would limit the size of my dreams. But unlike my dad, I found the opportunity in this industry that opened doors exactly like the ones I’m presenting to you today. 

Though my family and friends may have thought I was crazy in the beginning, I left my career plans as an accountant never to work at a job again. This industry gave me the structure and resources I needed to build my own business, to set my own schedule, to build a team, and to become my own boss. There are two other important things this new opportunity provided – no limitations to how successful I could become – and an unrivaled financial education.

Early in my career, I read a financial quote by Albert Einstein that made a big impact on me. What does it mean when one of the most brilliant scientists and mathematicians of all-time comments about financial truths? It means you should write it down, memorize it, and maybe even tattoo it somewhere. 

He said: “Compound interest is the greatest mathematical discovery of all time.  It’s the eighth wonder of the world.  He who understands it, earns it – he who doesn’t, pays it.” 

The lesson: money can work for you or against you. 

When you save or invest, money works for you. Let’s look at how this works and how your interest rate can make all the difference in what your return will be.

If your parents had put $10,000 into a savings account the day you were born, and that lump sum yielded a 1% fixed interest rate, you’d have $20,471 waiting for you when you turned 72. If the interest rate was 4%, you’d have $168,423. What do you think the value would be at 8%? Would it surprise you that you’d have $2,549,825. That’s 15 times more money by simply doubling the rate from 4% to 8% over your lifetime.

These are the kind of A-HA! moments that are waiting to be shared with generations of people in desperate need of help. These are the kind of principles that move people, move money, and enable you to take advantage of The Wealth Wave.  The chance to share this kind of life-changing knowledge with others is what drew me into this business.

When you borrow money, it works against you! Credit card debt, mortgages, bank loans for your business, student loans, and car loans are all examples of compound interest working for someone else at your expense. If you could share these simple principles with people in your community who are thinking about activating a credit card or signing a big car loan, what impact could that have over the course of their lives?

When I looked into starting my own business as a financial professional more than 30 years ago, learning about the Rule of 72 was the BIG A-HA! for me. I can still remember how mesmerized I was – like I had just been handed the skeleton key to the halls of wealth. I couldn’t believe that in all the college financial courses I took, it was never mentioned.

It’s a tremendous mental math shortcut to estimate the effect of any growth rate.

Here’s how it works… If you divide the number 72 by the interest rate, the result is the approximate number of years it takes for money to double. 

Simple. Profound. Valuable.

At 1% rate of return, it takes 72 years for $1 to turn into $2. Do you have any idea how much money in this country is earning less than 1% today?

Would you be surprised to hear there is over $11 trillion sitting in savings, money market and cash equivalent accounts as of June 2, 2014… all earning less than 1%?

Savings account rates are currently averaging .11% while 1 year CDs average .24% and 5 year CDs average .79%.

At 4%, it takes 18 years for money to double. It’s a simple formula. Now, instead of your money doubling once over your lifetime, you could experience two or three doubles.

At double the rate of return 8% – it takes half the time, 9 years for money to double. What if your money doubled four or five times in your life?  

So if you think that a difference of 1% or 2% won't amount to much, you're seriously underestimating the power of compounding, and you'll pay a huge price.

Let’s say it another way.  At 29 years old, if you had $10,000 earning a 4% rate of return, your money would double in 18 years. You’d be 47.

If you could find a way to earn 8% rate of return, your money would double in only 9 years.  You’d only be 38.

You can also look at the Rule of 72 in action with color bars. With each rate of return increase – another color or two is added – your money doubling faster.  The more rate of return you earn the smaller each color becomes.

Starting with $10,000 in each example, you can clearly see how long it takes to double to $20,000 and then $40,000 and beyond.  Each double has its own color. 

If you earned 6% on a $10,000 investment, after 36 years, you’ll have $80,000. That’s three doubles in your working lifetime. 

If you double your return from 6% to 12%, it’s not just double the money, it’s actually EIGHT times the money. Look at how many colors there are in there that’s how many doubles you could get over your working lifetime. 

The factors that make the Rule of 72 work for you are: time the interest rate you earn – and how much money you put into savings. 

When people don’t have time on their side, they’re faced with doing one of two things - either adding more money or earning a higher interest rate.

Generally aiming for higher returns often means increasing risk. So if you don’t want to add risk and you don’t have all the time in the world, what do they have to do? You have to save more money. 

So we look at ways to help people save more money without trying to impact their lifestyle.

The Rule of 72 is so simple and powerful. Once I’d learned these concepts, I couldn’t unlearn them. My thinking was changed forever. As I shared this new knowledge with others, I found that it had the same effect on them. I learned that most people you know have never heard of these truths. 

By giving a financial education, you have the opportunity to help unlock the doors of wealth and prosperity for people you know and care about. This is what drew me into this business and why I love what I do more every day. New information opened understanding. New understanding changed behaviors. New behaviors created paths to financial success.

(The Rule of 72 is a mathematical concept that approximates the number of years it will take to double the principal at a constant rate of return compounded over time. All figures are for illustrative purposes only, and do not reflect the risks, expenses or charges associated with an actual investment. The rate of return of investments fluctuates over time and, as a result, the actual time it will take an investment to double in value cannot be predicted with any certainty. Results are rounded for illustrative purposes. Actual results in each case are slightly higher or lower.)