From Chapter 4 -- A Simple Guide to Becoming Financially Independent

The Rule of 72

Why did Albert Einstein call the magic of compound interest the eighth wonder of the world? It came from a simple concept called the “rule of 72.” Essentially, you divide 72 by the interest rate your money is earning, and that is how long it will take your money to double.

For example, assume you start with $4,000 when you are 22, and the money earns 10% a year, every year. Applying the rule of 72 (72 ÷ 10= 7.2), we find that your money will double in 7.2 years. The buildup would look like this:    

Age	$ Amount
22.0	4,000
29.2	8,000
36.4	16,000
43.6	32,000
50.8	64,000
58.0	128,000
65.2	256,000
72.4	512,000
79.6	1,024,000
86.8	2,048,000
94.0	4,096,000

Isn’t it staggering to know that $4,000 put away at age 22 will grow to about $4 million when you reach age 94! While growth during the first 40 years is impressive, the accumulation is truly mind-boggling during the last 30. (Note that the rule of 72 is a rough estimate. With annual compounding at 10%, you will actually have $3,822,375 at age 94. But that’s not too shabby!)

Divide 72 by the interest rate your money is earning to approximate how long it will take your money to double.

Looking at this chart, we can easily understand why people who are born into wealthy families are nearly always bound to be wealthy! Can you imagine if money were put away regularly for you, beginning when you were a baby, and you didn’t touch it for 60 years?

For this reason, I say repeatedly that getting rich is easy, especially if you are willing to become rich slowly—say in 30 or 40 years! Clearly, the phenomenal compounding begins to be quite powerful after 30 years. Unfortunately, the vast majority of people in the United States don’t start saving until they are in their 30s or 40s…or even their 50s.

If you learn nothing other than the magical power of compound interest, this book will be worth its weight in gold to you. Can you see how critical it is to begin saving money as young as you possibly can? If you want to be extremely comfortable and financially independent someday, begin saving 10% of your gross income the moment you begin working, if you possibly can.

The story behind Jan’s motivation to prosper

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