Most everyone has been taught the Rule of 72 at one time or another. The rule approximates the number of years it takes for money to double. To determine this, divide 72 by the interest rate. If you know the interest rate is 6 percent, then it will take 12 years for money to double. If the rate is 10 percent, then 7.2 years will be required for the money to double. It is that simple! All you need is a pencil and paper to figure out how much is needed in retirement.
There is another principle — money grows in intervals. At 10 percent, during the first 7.2 years, $1 will grow to $2. And, after the first 7.2 years, $2 will grow to $4, and after that, $4 grows to $8 and so on. Each subsequent interval doubles the starting amount. Another way to look at this is to see it only took half of an interval to accomplish what was earned in the previous interval. So, in interval one, it took 7.2 years for $1 to grow to $2. But in interval two, it took 3.6 years for $2 to grow to $3. Likewise, in interval three, it only took 1.8 years for $4 to grow to $5.
Compound interest is very exciting. However, you must note how long it takes to complete the first doubling — a full 7.2 years. This is why people fail financially. They want the results derived in intervals two and three, but can’t tolerate how long it takes to complete interval one. It is impossible to achieve interval two and beyond unless you complete the FIRST interval. You can try to speed up your results by taking more risk or adding more capital, but you can never add more time.
Remember, we are in the compound interest business. Teach your clients the power of growing money over long timeframes. It is the only way financial success can be achieved.
