Introduction

When it comes to making smart financial decisions, understanding the principles of investing and the power of compounding is crucial. One of the most useful tools in the world of finance is the Rule of 72. Whether you’re a seasoned investor or just starting on your financial journey, this rule can help you estimate the time it takes for your investments to double in value. Let’s delve into the Rule of 72 and see how it can work for you.

What is the Rule of 72?

The Rule of 72 is a simple formula used to estimate the number of years it will take for an investment to double at a fixed annual rate of return. It provides a quick approximation, and while it’s not entirely precise, it’s surprisingly accurate for most practical purposes.

The formula is straightforward:

Years to Double = 72 / Annual Rate of Return

Understanding the Power of Compounding

To appreciate the Rule of 72 fully, it’s essential to grasp the concept of compound interest. Compound interest is the interest earned on both the initial principal and any interest that has already been earned. In simple terms, your money earns interest on top of interest, creating a snowball effect over time.

For example, if you invest $1,000 at an annual rate of return of 8%, in the first year, you’ll earn $80 in interest. In the second year, you’ll earn interest not just on your initial $1,000 but also on the $80 in interest from the first year. This compounding process continues, and over time, your investment grows faster.

Putting the Rule of 72 into Action

Let’s illustrate the Rule of 72 with an example:

Imagine you have $10,000 to invest, and you’re considering two different investment opportunities. Investment A offers an annual rate of return of 6%, while Investment B offers a rate of return of 12%.

Using the Rule of 72:

• For Investment A: 72 / 6 = 12 years to double your money.
• For Investment B: 72 / 12 = 6 years to double your money.

This means that with Investment A, it will take approximately 12 years for your $10,000 to grow to $20,000, whereas with Investment B, it will only take 6 years to achieve the same result. The Rule of 72 helps you compare the growth potential of different investments quickly.

Limitations of the Rule of 72

While the Rule of 72 is a handy tool, it’s important to remember that it provides an estimate and may not be entirely accurate for extremely high or low interest rates. It’s most accurate for interest rates between 6% and 10%. Additionally, it doesn’t take into account factors like taxes or inflation, which can impact your real returns.

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Conclusion

The Rule of 72 is a valuable concept in finance that can assist you in making informed investment decisions and understanding the time it takes for your money to double through the magic of compounding.

By using this simple rule, you can quickly compare investment opportunities and plan your financial future more effectively. Remember that while the Rule of 72 is a helpful tool, it’s just one piece of the larger puzzle of financial planning.

Combine it with a well-thought-out investment strategy and diversification to achieve your long-term financial goals.

A Video recap of the book

Introduction

Robert Kiyosaki’s “Rich Dad Poor Dad” is more than just a book on financial literacy; it’s a guide to a mindset shift about money and investing. By contrasting the mentalities of his “Poor Dad” (emphasizing traditional education and a stable job) and his “Rich Dad” (focusing on financial education and investing), Kiyosaki presents fundamental lessons in personal finance. Here are some key takeaways from the book and how you can apply them to your day-to-day life.

Lessons

1. The Importance of Financial Education
   • Takeaway: Unlike his Poor Dad, Rich Dad believes in the power of financial education over traditional academic and professional education.
   • Application: Start educating yourself about finances. Read books, follow finance blogs, or even take courses on personal finance. Understanding how money works is the first step towards financial independence.
2. Assets vs. Liabilities
   • Takeaway: Rich Dad emphasizes investing in assets (things that put money in your pocket) as opposed to liabilities (things that take money out of your pocket).
   • Application: Assess your spending habits. Focus on acquiring assets such as stocks, bonds, or real estate investments that can generate income or appreciate over time, rather than liabilities like excessive luxuries that depreciate.
3. The Power of Passive Income
   • Takeaway: Rich Dad advocates for creating streams of passive income to ensure financial security and freedom.
   • Application: Consider ways to generate passive income. This could be through rental properties, dividend-bearing stocks, or side businesses that require minimal ongoing effort.
4. Work for Learning, Not Just for Money
   • Takeaway: Rich Dad suggests working to learn, not just to earn. This means seeking jobs or opportunities that offer skills and experiences that are valuable in the long term.
   • Application: Choose job opportunities that provide skills like sales, marketing, or management. These skills are transferable and can be leveraged in your own ventures or investments.
5. Overcoming the Fear of Financial Loss
   • Takeaway: Rich Dad teaches that overcoming fear and taking calculated risks is essential in achieving financial success.
   • Application: Don’t let the fear of losing money prevent you from making investments. Start small if necessary, learn from any losses, and use these experiences to make more informed decisions.
6. The Importance of Giving Back
   • Takeaway: Rich Dad believed in the importance of giving back, a principle that often leads to more financial and personal fulfillment.
   • Application: As you grow financially, look for ways to give back. This could be through charitable donations, mentoring others, or investing in community projects.

Integrate these lessons into your life.

“Rich Dad Poor Dad” isn’t just about becoming wealthy; it’s about changing your mindset towards money and how you handle it. By integrating these lessons into your daily life, you can begin to build a more secure financial future, grounded in knowledge and strategic thinking.

Remember, it’s not just about earning money, but about making your money work for you. Each decision, from the books you read to the investments you make, can be a step towards financial independence and security.

Largely taken from

Although focused on wealthy Americans, there are some interesting takeaways.

• Don’t try and look rich for example don’t buy a new car to show off rather save some of that money for future you.
• Feel Secure and don’t feel pressurized to spend money to keep up with your friends and neighbours
• Defend the money you make by budgeting and planning and Generate your offence

• Aim to save 15% of your income every year.
• Use a Budget app to find areas of savings
• Plan you spending
• As you earn more keep your spending the same and save the rest.

A related topic is reaching that £100,000 savings amount as quickly as you can why your first 100k is the magical number for generating real wealth