Rule of 72
The magic in investing is in compounding. That is why knowing your personal "Rule of 72" is so important. This ratio tells you how quickly your net worth is doubling. It is simple and quick to calculate.
First, you will need to know your net worth over a period of time. And that's basically it. For argument's sake let's use 1-year as the base timeline and a $100,000 start value and a $110,000 end value a year later. Utilizing the "Rule of 72," ie subtracting $100,000 from $110,000 yields $10,000 or a 10% yearly return which then is used to divide 72 resulting in the number 7.2.
7.2 would be your personal "Rule of 72." Assuming an average lifespan of 78 in the United States, that would be ~ 11 doubling cycles. Or that $100,000 would turn into about $205,000,000. That is a nice chunk of change! Very few of us start off with $100,000 at birth and perhaps more importantly, very few can avoid touching that stash for a lifetime. Life happens. That is the great challenge we all face.
But the take-away from this post is this: If you know your personal "Rule of 72" you can modify it. Compressing it is like compressing time; even marginal decreases in your personal "Rule of 72" can have meaningful, life-altering results. Better housing. Better food. Better education. Better healthcare. Better outcomes at almost every life touch point.
In a typical life, just adding one or two more net worth doublings can make drastic differences. That is the difference in a 7.2 versus a 6.0. Imagine doubling your net worth every 5 years! This is why typically most people who can survive in the investing game the longest win, they have more doubling cycles at their peak net worths. Consider, Warren Buffett made more than 95% of his net worth in the last 10 years. Staggering.
Start investing young, ideally at birth. Continue investing throughout your life. Keep a low "overhead" to avoid interrupting your net worth doubling cycle. Avoid losses. Spend judiciously.
