The rule of 72: small sums can make a big difference

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The rule of 72

Tim Bennett Explains: The rule of 72: small sums can make a big difference

Published on Apr 13, 2016

This handy shortcut lets you quickly judge the impact of different growth and inflation rates. Here’s how it works.

The rule of 72

The rule of 72

0:10welcome to this killing explains finance video this week the rule of 72 or how
0:18small sums can make a big difference now remember something I’ve covered before
0:22another videos
0:24the awesome power of compounding you have a friend when it comes to long-term
0:28investing you are many people who have won call compounding and supposedly
0:32albert Einstein no less call it the eighth wonder of the world is the
0:36ability to make money on money and is at the heart of what about say next
0:41now the rule of 72 is a really convenient back of an envelope shortcut
0:46to explain how fast you’re going to double your money without loss of
0:50complex mass it was dreamed up by somebody who probably should have got
0:55more often but is very useful and it basically says if you want to know the
0:59answer the question how long will it take me to double my money to get an
1:02annual growth rate it gives you the answer without having to go to a
1:07spreadsheet user complex calculator using mathematical formulae it’s pretty
1:11handy in other words if you divide 72 and rule of 72 by the growth rate you’ve
1:18got in mind you get an approximate estimate of how long it will take you to
1:22double your money so how does that work some quick look now it works really well
1:27in a certain range of interest rates in terms of accuracy in about five in about
1:3212 percent Its a really handy rule of thumb and it can be adjusted the numbers
1:36outside that range I’ll leave that beyond the scope of this current video
1:40says look at three right we’re going to work quite well
1:4210% 8% 6% these are not guaranteed
1:46just as illustrations now how long will it take me to double my money that takes
1:51a bit of fiddling around with a calculator spreadsheet or proper formula
1:55rule of 72 just says divide 72 by that number and you get about seven years
2:01there’s your answer at eight percent seventy 2/8 is around nine years to
2:07double your money remember seventy 2/6 is the power of compounding earning six
2:13percent 6% 6% each year and it took about twelve years
2:17double the original song that’s pretty need now how accurate is it well just a
2:22that after a quick proper calculation if you like using a problem compounding
2:27calculator and what you find is if you apply 6% to rate to an original number
2:34one hundred pounds so up to one year ago hundred pounds plus six pounds then you
2:39take the hundred and 66 percent on top of your hundred and twelve hundred and
2:43twelve and sixteen on top and so on
2:45you get to a point you double your money after around 12 years 201 pounds not
2:51exactly 200 pounds but near enough to those yet rule of 72 demonstrated to
2:56work if you like at a rate of 8% I suggest on the previous slide around
3:03nine years using the rule of 72 exactly how much bang on their two hundred
3:07pounds you know the compounding calculator with a rounding and a 10%
3:11well no but after seven years yet with around a hundred and ninety five pounds
3:18so the true answer is more like seven point two years you get the idea
3:23the back of an envelope way of calculating how long it take double your
3:26money pretty handy now that you can reverse it you could also say alright if
3:32I assume asset inflation right how long will it take to haul my money at those
3:37inflation rates inflation rate of 10% we have had that in the UK in the past
3:42albeit not now the rule of 72 is about seven years
3:45same principle 72 divided by the number give you the answer at eight percent
3:50about nine years and six percent about 12 years so it can be turned on its head
3:55and used like that and that’s interesting for investors when you look
3:59at what I’ve called before the problem with cash and the problem with cash is
4:04that in real terms it is basically a road in your ability to buy stuff is
4:09only viewable seen this child before we go back to the early seventies alright
4:13and look at the purchase purchasing power 100 pounds but it didn’t take long
4:17to have that when inflation was much higher than it is now
4:22family is handy to tell you how long and now you’re right down to more like four
4:29to six or seven
4:30money’s worth purchasing power pretty bad news so it’s turned on its head and
4:34look at something more positive and it’s basically days we should all be siding
4:39and if we’re not gonna saving cash where do you wanna be saving well somewhere
4:43else so how we gonna save more than where we gonna save it
4:47well here are some suggestions about around my life the moment only know
4:51handle their ways I can save money on travel and every little bit helps I
4:56could be clever away I use my card for example I can save money on things like
5:01my cable TV channels I can save money on bills by shop around a bit more
5:05regularly but more often and i cant even shave it off my mortgage in let’s say I
5:10sit down and actually do that one day and come up with the idea I could save
5:14then easily hollywood that we are without noticing an extra fifty pounds a
5:19month why am I gonna do with it
5:21probably getting your idea of this not putting cash to invest it in something
5:28wet my pussy power won’t be around hopefully like shares let’s run a few
5:33scenarios just have any shelf so imagine imagine i kidded 2% over 25 years as a
5:39pretty conservative estimate remember it’s fifty pounds a month I’m saving the
5:44under 25 years that’s a fairly tidy sum of twenty thousand pounds twenty
5:48thousand pounds it meaningful some and I’ve got it by just squirreling away an
5:52extra fifty pounds and I hardly noticed where I had to cut costs in order to get
5:56that 50 pounds 2 percent isn’t very exciting imagine I couldn’t 5 percent
6:02instead no guaranteed
6:04imagine I could do that UK’s long-term returns from shares of the last 50 years
6:10with such evil is out there certainly are safe 30,000 pounds just attacking 50
6:15pounds away every month and it a little bit aggressive about it I could get 8%
6:20not crazy about Google 8% then suddenly my becomes 48,000 pounds
6:27five years so there you can see how small amounts to make eventually a big
6:32difference if you let compounding work for you lots covered there you’d like to
6:37know more about the rule of 72 when it works when it doesn’t like nothing else

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