If it’s not already obvious, I’m not really a writer. I’m more of a numbers gal. I find their rules and logic comforting, like how you can multiply any number between 1 and 10 with the number 9 and the digits of that sum when added together will also equal 9. Did I lose you? Here are a couple of examples: 4 x 9 = 36, break 36 apart and 3 + 6 = 9; or 5 x 9 = 45, break 45 apart and 4 + 5 = 9. Feel free to use this at parties as an ice breaker.
That’s why I’m enamored with the Rule of 72. The Rule of 72 states that dividing the number 72 by the rate of return or percentage increase of an item or expense will tell you roughly how long it will take for that amount to double. An example may help. If you assume that you can earn an 6% average return annually on an investment, then the Rule of 72 states that your investment will double in approximately 12 years (72 ÷ 6 = 12).
I know what you’re thinking, “That’s interesting, Elizabeth. But how does this affect me?” Well, what about inflation? I know it hasn’t been high recently, but it can have a big impact on your future expenses and therefore the amount you need to save for your long-term goals. So let’s say inflation is 2% on average. In our example, it would take 36 years for the price of goods to double (72 ÷ 2 = 36). What if inflation ratchets up to 5%? Then prices would double in just over 14 years (72 ÷ 5 = 14.4). That’s something to consider when pondering what your expenses will be in retirement. For a lesson plan on inflation, check out What Did It Cost 100 Years Ago?
Other uses for the Rule of 72 include estimating how quickly college costs or healthcare costs will double. That’s something to keep in mind when you’re deciding whether to save part of an unexpected windfall towards your financial goals or go out and spend it.
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