Have you ever heard of the Rule of 72? Albert Einstein is
quoted as calling it ‘the eighth wonder of the world.” Some sources say he even places a greater value
on it then his beloved E=mc2!
The basic premise is: take the number 72, divide it by the rate of
return (ROR) you are receiving on your investments, and it will give you the
number of years it will take for that sum of money to double. For example, let’s say you invested in
something that was giving you an average of 8% return over the years. You then take 72 / 8% = 9 years. That means that every 9 years your original
investment will double. **small
explosion** That was the sound of your mind just being blown. Let’s see this in action in the chart below:
In this chart we see that at 4% ROR we double our money
every 18 years. Let’s say you went to
the bank and invested in that super awesome rate of return (please sense the
sarcasm in that sentence). In fact, the
banks usually put you in a savings account earning maybe 1% or into a GIC (pushing
the fear of possible loss in the markets and that you want the safety of a GIC –
that will be for another blog though).
But the highest return on a GIC that I could find on Google as of this
date was 2.45%. 72 / 2.45% = just above
29 years. How many doubling periods do
you have in your lifetime? Not to
mention that the rate of inflation is about 3% annually, so that your money is
actually losing value by being in a GIC.
Did the bank’s financial planner mention the risk of inflation outpacing
your investments? Probably not. They probably don’t know better because they
are trained by the bank’s system, and who do you think the bank is looking out
for? You? You better hope that Canadian scientists find
that fountain of youth real quick because you aren’t going to make it if you’re
counting on 2.45%. In fact you would
probably be better to make charitable donations to the institute that is
researching the fountain of youth than investing in a GIC for long-term growth –
you would probably make better returns by getting a better tax return than the return
you will get on 2.45%. End of rant until
another day.
So you have given the bank your $10,000.00; what do you
suppose the bank then does with you initial deposit? Do they stick it in the vault and wait for
you to draw from it again? They either
invest it in that “big scary market” they told you to avoid (slave masters
tricking their slaves into staying slaves again and again) or they do something
even worse: they lend it back to you on a credit card or high interest unsecured
line of credit (now you’re not only a slave but you’re a shackled slave). Most mainline unsecured credit cards run from
12% to 29% interest. Yes, that’s right;
the banks know the rule of 72 all too well and they will use it against
you. 
Let’s assume you only got the reasonable 12% interest card;
that means the bank was doubling your money every 6 years. The $10,000.00 you gave them over the years
now multiplies up to $640,000.00 over 36 years.
So they give you your GIC “guaranteed not to lose money” 4% earnings of
$40,000.00 over 36 years at 4% and they pocket the other $600,000.00 you left
on the table. Getting irate yet? Now you know why I talk so passionately about
a boring topic like finances. The
everyday Canadian is getting fear mongered into not having their money work
hard for them and then getting shackled by the lucrative industry of buy now
pay later.
First of all let’s take a look at the fears out there: war,
conflict, recession, unstable markets, yadda-yadda ... whatever (in my best teenage
high school girl obnoxious voice). This
is all thrown at us on a daily level. If
you ever watch the news, it’s all fear-based and that fear becomes the
invisible shackles that keep us paralyzed and keeps us repeating the loop of
defined insanity hoping for something better.
Take a look at this brochure produced by CI Investments posted by Infinite Financial
(read their article but only after you finish mine):
This just goes to show that even if your investments had
suffered through the Great depression and World War II, you still would have
come out on top with long-term investing.
Once again, this illustrates how it’s our mindset/philosophy about money
that determines whether we stay a part of the “1-percenters” or the “99-percenters.”
So block out all the Armageddon fear-mongering out there! There is a growing percentage of the middle
class that are assuming the Armageddon will come and so there is no need to
prepare for the future. Not to get all
preachy or religious on you, but take a look at the Bible: 2 Thessalonians 3:10:
“He who does not work shall not eat.” Paul
was saying this to the early Christian community because there was a number of
people doing no work at all because they were sure that God was coming and the
end of the world was any day now, so they just gave up and waited. Let me try and bring this home to you: those who don’t get their money to work for
them won’t eat! Just go talk to any elderly
woman working as a greeter at Walmart if she would rather be there or spending
more time with her grandkids – most of them aren’t there because they choose to
be. The sad problem is no one taught her
to get her money to work for her, or she was made to fear investing in anything
but bank GICs. She waited, hoping and
trusting in the system, and it let her down.
Now she is paying the price. Don’t
let fear grip you. Take control! Be the BOSS, be in charge of your
finances. The “1-percenters” have almost
an eternal belief that no matter what happens, things will get better. They aren’t afraid to lose. I once read that Donald Trump declared bankruptcy
several times. Think he’s scared? No
because even if he does lose his wealth he knows he can build it back up again;
that things will get better. I challenge
you to take a look at the numbers above and plot out any 10 years. In any 10 year period, was the market lower or
higher ten years later? Let’s look at 1974
the market was at 616 steepest market drop in 40 years; fast forward to 1984
and the market is at 1212, a 197% increase or an average of 19.7% per year
increase. In the previous 10 years you
would have lost some money from 1964 to 1974 but take that and stretch it out
from 1964 to 1984, 20 years you would have gained more than you lost. Take a look at the Franklin Templeton slide show,
especially slides 8 and 9: they show there have been way more gains than
losses. Now past performance cannot guarantee future returns (just in case a
compliance officer is reading this) but – come on – do we really believe that
all of humanity is just going to suddenly epically fail? Where is your hope people? And even if it did, that means that it wouldn’t
matter which investment vehicle you had chosen anyway – we’d all be in the same
boat fighting off zombies. With today’s
technology, new industries and emerging markets in third worlds: we build markets
and opportunities faster than any other time in history.
That is just the market investment opportunity – there are
many different opportunities to build wealth which we will talk about in time,
but don’t be fooled: if you don’t plan now, you may not eat later. You need to get the power of compounding interest
working for you; you need to get the ruler of 72, “the eighth wonder of the
world” working for you.
The corporations know about the rule of 72 as well. Does anyone know why Canadian Tire has a
financial division? I mean they are a
tire company for crying out loud, so why are they in finances? It’s because of the rule of 72. Ever walk into a Canadian Tire only to be greeted
by someone asking you to sign up for their free Canadian Tire Card? Which is at
19.99%.
Don’t believe it? Click on the link. Have you ever gone to Walmart and have them
ask if will you be paying with your Walmart Master Card from Walmart financial?
That one is at 25.99%,
but you need to read it in the fine print to find out, and only once you’ve
read all the grrrreat advantages you get in large bold print. This is why Walmart can sell all their
merchandise at such low prices and put moms and pops shops out of
business. They can lower their prices by
15%, get you to put it on the card, play the law of averages that a lot of your
purchases will stay on the card, charge you the crazy interest, and still make
an extra 10.99%. Now these numbers are
pretty simplistic, but believe me that’s why so many big-box stores have a financial
division. It’s to steal more money from
you and get the rule of 72 working for them. “But I get all those extra Walmart points and Canadian
Tire dollars when I sign up for the credit card,” you say. Trust me; the benefits don’t outweigh the cost.
Here is a thought: if this is how we all do business anyway;
maybe towns through the chamber of commerce and local credit unions could
create a town card with membership rewards programs for all the moms and pops
store and small business in the town. They
could totally mark down the prices and share some of the profits with the other
moms and pops stores. This would allow
some of small local businesses to offset their costs and possibly lower their
prices; it would also increase customer loyalty, and customer awareness about
local small businesses; and town pride! Just
a thought, in case there are any active civil servants out their passionate
about their communities. Beat them at
their own game.
So now you know how the Rule of 72 can either work for you
or against you. Let’s take a look at
what the most basic wealth creation formula is:
Wealth = Money X Rate of Return (ROR)
X Time
- I will show you how to save on debt and taxes and even build a kick arse budget that won’t leave you feeling like you have no life; those strategies will help solve the money problem.
- I will also show you different investment options over time and teach you what you need to do to help you choose investments that are right for you. That will solve the ROR problem.
- But the only problem that is completely dependent on you is the TIME! The major thing that will stop all financial plans dead in their tracks, no matter how good it is: PROCRASTINATION! I know it’s hard to get started and to get all your poop in a group but it is imperative that you do!
Let me show you an example of
waiting till later and investing earlier:
We see that for half the money, Mr. Start Early, made almost
the same amount of money as Mr. Wait Longer.
Now this is just an illustration and there are many other factors but
the more doubling periods your money can get (the RULE of 72), the less you
have to work, because your money is working and growing for you!
Let’s say you want $1 million dollars (in best Dr. Evil
voice) for retirement by the time you are 65, and you receive an average of 8%
over the time of your investments. Now
depending on the age you start to save, you could either have to save as little
as $290/month or as much as $81,000/month!
Start at: Monthly
savings required:
Age 25 $290 /month
Age
35 $680 / month
Age 45 $1700 / month
Age 55 $5500 / month
Age 64 $81,000 / month
Do you see now how powerful the rule of 72 is? How you need to get time on your side? You need to get as many doubling periods as
possible working for you. Procrastination
is the number one killer of wealth. The
best time to start a financial plan is now ... unless you have a time machine
then it would be yesterday... but for those who don’t have that technology:
now, immediately, today, is the time to start!
Tomorrow I will show you what good debts and bad debts are;
I’m sure you already have an idea about bad debt, but can there be good debt?
You might be surprised! I know I was. See you tomorrow!
If you would like to speak with me more in-depth about
building a financial plan, please click here. But don’t waste my time or yours – only click
here once you’re ready to move forward; both of our time is valuable!
If you aren’t quite ready to move forward with a
plan, scroll down and subscribe so you can read the next blog on finances till
you’re ready to move forward.
No comments:
Post a Comment