hi i'm jimmy in this video we're going to look quickly at the rule of 72
the goal of this video is to help us quickly be able to
calculate either what interest rate we may need
in order for our investments to double up or
how long it will take for those investments to double so how long will
it take for us to double our money so this is a fairly
simple calculation and the video shouldn't be too long at all
but before we get into the calculation itself i think we should really clarify
the difference between compound interest and simple
interest so let's imagine that we have ten
thousand dollars and we say okay we're gonna earn ten percent a year
for the next ten years well ten percent of ten thousand dollars
is we could say okay that's a thousand dollars a year ten years that's
ten thousand dollars that we've earned therefore in ten years we've doubled our
money but this is simple interest we know that
it's simple interest because the assumption here is that our
one thousand dollars that we earn each year
isn't earning anything for us compound interest on the other hand
is when we assume that the interest that we earn
will then be reinvested and earn interest for us so if it takes 10 years
to double our money with simple interest how long will it take to double our
money with compound interest well this is where the rule of 72 comes
in and it's really quite simple so we take 72
and we divide that by our expected return in our case
we're saying 10 and we need to divide this by the whole number
so i know that 10 is actually 0.10 but we're just going to say 10. so 72
divided by 10 tells us that it will take 7.2 years
to double our money using compound interest
if we can earn 10 a year simple enough so
what if we earn 5 a year well 72 divided by five
and just like that we know that it takes 14 and a half years
give or take to double our money but what if we said hey i want to double
our money in five years what do we need how much
do we need to earn to make that happen well the rule 72 once again works for us
so we take 72 we divide it by five which represents the five years that we're
looking to invest and just like that we realize that we
need to earn 14.4 percent to double our money in five
years now for all of the critics out there we
might look at this and say well it doesn't really work what if i
wanted to double my money in one year well 72 divided by one and we get
72 percent and yes this is true the rule of 72 is supposed to be a
quick and dirty way to make calculations and it's not nearly as effective on the
extremes so one years two years three years it's
somewhat weak but it's getting closer as the
number of years increase so with our five-year example well the
exact math if we were to earn 14.4 percent
for five years assuming we started with ten thousand dollars
well at the end of five years we would have nineteen thousand
five hundred ninety four dollars so not exactly twenty thousand not exactly a
double of our money but fairly close considering how quick
and simple the math is and this is also true when we're
calculating the number of years so let's say we're going to earn 72
percent well 72 divided by 72 is one year but as we
know we need 100 to double our money so we
didn't in fact double our money with 72 percent once
again we have to stay away from the extremes
so if we stay with let's say reasonable numbers
then this shortcut could really serve us well
and i'm guessing that most of us want to earn
as high of a return as possible to help us double our money
faster and i think a lot of that comes down to our ability
to invest smartly and if we're going to invest in individual companies
i think we need to make sure that we have a good understanding of that
company and i actually did a video where i go
through the eight steps of analyzing a stock
and if you're curious perhaps that could be a good next video for you to watch
i've got a link right here i've got a link in the description below and thank
you so much for sticking with me all the way to the end of the video
i really appreciate it thanks and i'll see in the next video