Isabelle Rousseau, business manager
Many often wonder what the secret to becoming wealthy truly is. “Getting rich quick” has become the new obsession of our generation as we try to meet our never-ending wants. The answer to this old-as-time fascination with obtaining abundant treasures and riches has been hiding under our noses for too long. Unfortunately, it takes many years of patience to work its magic, just like anything else worth having, but it is truly a blessing to your bank account or investment portfolio.
What I am referring to is “the rule of 72.” The rule describes how long it will take one to double an investment.
The formula is quite simple: 72 divided by the interest rate you expect to collect, equals the number of years it will take for your investment to double. Let’s start with a simple example. On average, the stock market sees returns of about 7 to 10% per year. If we expect to receive 10% interest, it will take 7.2 years to double our investment (72 divided by 10 equals 7.2). This means that if you invested $100 in 2021 and expect to receive 10% every year, by 2028, you will have $200.
Patience is not only needed, but required as far as the rule of 72 is concerned. The idea behind this theory is that one will invest money and leave it alone until they need it or until they retire. Now, time is your friend here; the more time you have, the better off you and your bottom line will be.
The nicest part of the best-kept secret in finance is that you did not even have to work for this money! It just appeared, how awesome is that? Remember, money is your employee, make it work hard for you! That is what passive income is all about.
Food for thought: imagine you could earn higher than 7 to 10% interest per year; say 50% interest per year instead. It will then take just under a year and a half to double your original investment (72 divided by 50 equals 1.44). Earning a yearly interest rate this high is very difficult to do, but not impossible. T h o u s a n d s of investors c o n s i s t e n t l y achieve this great percentage or higher. It will take time to learn how to pick undervalued, large growth stocks and develop a high-interest-yielding investment strategy, but once you master this art or get lucky, you will be well on your way to accomplishing higher yearly interest rates. Like I said before, time and patience will work magic and fill your piggy bank, because anything is possible in the world of investing.
The rule of 72 is possible because it works hand in hand with its best friend, compounded interest. Compounded interest is interest earned on top of previous interest and the principle, or the original, amount. For example, if we invest $1,000 today at an interest rate of 10%, in a year we can expect to receive an interest payment of $100. Now the total amount we hold in this investment account is $1,100. If we leave this new sum invested at the 10% rate, the interest payment will be $110. Compounded interest is cool because it consistently pays higher interest payments every period because the amount invested constantly gets higher and higher as you saw in the previous example.
Compound interest and the rule of 72 is the secret to getting rich and growing your money. Understanding these topics is crucial when it comes to building your financial profiles. Knowledge is the key here, and if you are curious to learn more about finance, or want help paving your own path to financial freedom, please visit http://www.OnePathFinancial.com.