Understanding The Power of “72”
If asked about the number “72” and if it has any significance to you, other than it possibly being one of your favorite sports players number, or the address where you grew up, this number most likely means nothing. Ninety nine percent of all people know nothing about the importance of this number in basic economics.
I was fortunate enough to learn about the number “72” when I was in high school taking a college preparatory math class. Although it was not part of the curriculum, my teacher spent a few minutes every Friday talking about real life and how to not only survive, but also succeed in the world once we graduated high school. He explained to us that with his modest income, and his wife also working at a modest income, he was going to retire in five years and he and his wife would be a millionaire. He was not sharing this information to brag or boast, but to make his students aware that with proper money management, we could also become independently wealthy.
This was back in 1978 when no one in my class knew a millionaire personally. I was excited to hear everything he could about how he achieved this goal. His basic knowledge and teaching myself about the “Power of 72”, helped me after I graduated from high school to manage my money and realize that wealth was achievable.
Now that I have your attention, I will explain why 72 is a very important number. With any rate of interest, whether it is in CD’s, stocks or bonds, or real estate appreciation, if you take the rate of return you are getting on your investment, and take 72 divided by this number, you will be able to see how long it will take you double your money.
An example of this is if you have $10,000.00 invested in CD’s that are earning 6% Interest per year, you would take 72 divided by 6 and get 12 as your answer. This means that it would take 12 years to double your money. If you could get an 8% return on your money, your investment would double in 9 years (72 divided by 8).
Many ask why that is important. If you can invest early in your age, and get a good return on your investment, you can become a millionaire without investing a huge amount of money. Again, take this $10,000.00 investment. If you are 20 years old when you make this investment, and you decide to put it in safe CD’s earning 6%, your money will double and you will have $20,000.00 at age 32. If you continue at the same rate of return, you will then have $40,000.00 at age 44. At age 56 you will have $80,000.00.
Take that same investment of $10,000.00 and earn 8%, you will have $20,000.00 at age 29. At age 38 you will have $40,000.00. At age 47, you will have $80,000.00 and at age 56 you will have $160,000.00. By the time you reach the age of 65, you will have earned $320,000.00 on a $10,000.00 investment.
Compare the 6% return versus the 8% return. Although 2% does not seem like a lot of money, it can amount to hundreds of thousands of dollars if accumulated over many years. If you start early enough and invest properly, you will be well on your way to becoming a millionaire.