Let’s start off today’s post with a comprehensive list of fashion rules you absolutely should break if your rebellious, fiscally fabulous style sense inclines you to do so:
- Pink and red don’t pair well together.
- Neither do black and navy.
- Don’t mix silver and gold jewelry.
- Don’t wear white after Labor Day.
- Less is more (my personal least favorite)
- Leggings are not pants. (LOL)
Snooze fest, much? That’s enough negativity for today.
I’m not one to enjoy people telling me what to do, giving me unsolicited advice, or forcing their beliefs or ways of life on me.
Let’s leave that to your friendly neighborhood Mormons on bicycles, shall we?
I also don’t enjoy rules – AKA telling me what I can or can’t do.
However, there is one rule I live by, swear by, and share with all my clients. Today, I’m going to share it with you…
This rule has helped set me up for success. It has allowed me to create realistic, actionable goals for not only myself, but for my clients. This rule has changed my life and theirs, and I know it will change yours, too!
The Rule of 72
This rule is a simple way to estimate how long it will take you to double your investment given a fixed annual rate of return.
How? By dividing 72 by the annual rate of return of an investment, you – an investor – will know roughly how long it will take you to double your money.
For example, assuming an average annual return of 7%, it will take about 10 years for our initial investment to duplicate itself.
If only such math could tell us how long it will take to double the size of our shoe collections!
While the Rule of 72 is not a crystal ball of investment returns (if it was, I’d be out of a job) it does help investors start planning for the future. Investopedia gives an in-depth on the logic behind this rule here.
Style tip: Want to know other great ways to plan for future-you? Learn why you should S-H-O-P with every paycheck here.
Why does it matter?
Having an idea of how long it may take our investments to grow helps us answer the following questions in a comprehensive investment plan:
- How long will we need (or want) to stay invested?
- How much additional funds do we need (or want) to invest to reach our goals?
- Are we willing to take on more risk for the potential of higher returns?
- What other trade-offs are we willing to consider to achieve our long-term goals?
For many of my clients, demonstrating the Rule of 72 has helped them realize the importance of continuing to contribute to their investment accounts, reinvest the dividends they earn, and understand the powers of compound interest and time. (More on why I treasure compound interest even more than a Hermes Birkin bag here.)
How you can use the Rule of 72 right now
Take a peek at the current balance of your future-you accounts, including your 401(k), and their stated average annual return. You can typically find this and other helpful performance metrics on a recent statement or your account’s online portal.
Use the Rule of 72 on your average rate of return. How does the resulting number (aka your timeline) make you feel?
Don’t like what you see? Don’t worry. Simply now being aware of your situation is more than you had known before this read! Shoot me a message and we can create an investment game plan together.
New to investing? Want to know your investor style? Need help with the “behavior” side of finance, too?
Fear not, fashionista. I’ve put together a list of 10 books that will help you become a fiscally fabulous investor – even if you’re a beginner! The Rule of 72 is just the tip of the iceberg.
What other fiscally fabulous rules do you follow for your finances? Share below! Xx, The Finance Fashionista
