Rule of 72: Building Wealth for the Long-Term

Investing can be a daunting concept for many people, but it is an essential tool for building wealth over the long-term. Whether you’re just starting your journey or have been investing for years, it’s important to understand the basics and make informed decisions that align with your financial goals.

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One of the key principles of investing is to focus on the long-term. Short-term fluctuations in the stock market or other investments can be discouraging, but it’s essential to keep in mind that investing is a marathon, not a sprint. The more time you give your investments to grow, the greater the potential for long-term returns.

To help illustrate this concept, let’s take a look at the Rule of 72. This simple rule is a tool that can help investors estimate how long it will take for an investment to double in value, based on a specified annual rate of return.


The rule of 72

Calculation: To use the rule, divide 72 by the annual rate of return. For example, if you’re earning an 8% return on your investment, it will take approximately 9 years (72 / 8) for your investment to double.

It’s also important to keep in mind that the Rule of 72 is just an estimate and does not take into account taxes, inflation, or other factors that may affect your investment’s return over time. That’s why it’s crucial to have a well-diversified portfolio and to regularly review your investments to make sure they are aligned with your goals and risk tolerance.

The time factor

For context, while it’s important to note that past performance is not a guarantee of future results, historical data shows that the S&P 500 has delivered an average annual return of approximately (ARR) 10% over the long-term. This return takes into account both the ups and downs of the stock market over the years, including market corrections, recessions and bear markets. At 10% ARR, it would take just:

  • 7.2 years to double your initial investment
  • 14.4 years to 4x your investment
  • 21.6 years to 8x your investment
  • 43.2 years to 16x your investment

You can now see how a simple investment of $10,000 today, would equal $160,000 in 43 years, without accounting for any additional investment.

If you aren’t taking advantage of this, there is no better time than now to start. Just remember, there are a number of Federal tax incentives available to you, so make sure you’re leveraging them when you start your journey!

Achieving your goals

The Rule of 72 is a great way to get a sense of how your investments might grow over time, and to help you understand why investing for the long-term is so important. By focusing on long-term growth and reinvesting your returns, you can potentially accumulate significant wealth over time.

Great financial habits involve active planning, so I’ve put together a post about some winning habits that have helped me along the way.

If you enjoyed this post, check out our MILLK Wealth section for more Wealth winning ideas.

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