Understanding the relationship of time to money, Part 1 – The Rule of 72

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One of the keys to successful wealth creation is understanding the relationship of time to money.

Whilst a “get rich quick” idea might sound attractive, it is best to view those kinds of ideas as a hobby rather than a serious money-making venture.

A major factor in stable wealth creation is understanding that it takes time to build wealth. Understanding key principles will help put you in the correct frame of mind and after all, when we understand something, we tend to want to do more of it.

“Get rich slow” is a less attractive motto, but definitely much more appropriate.

So, the next few posts will highlight the importance of understanding the relationship of time to money.

Here is the first key principle – a simple way to work out how long it will take to double your money.

It is known as the Rule of 72.

Understand it, remember it and you will forever be the wiser for it.

Divide 72 by your interest rate and you get the timeframe it takes to double your money.

Example:  You earn 6% per year on your investment:  

72 divided by 6  = 12 years to double your money

Conversely, if you know the timeframe, but want to work out the required rate of return needed to double your money: Divide 72 by your timeframe and you get the interest rate required to double your money.

Example: I want to double my money in 9 years…

72 divided by 9 years  =  8% per year is required to double your money.

Now, think about the cash you have in the bank – what type of account is it in and are there other accounts that may be more suitable for you?

Cautionary note: Seeking higher returns will often require taking on more risk and volatility – it’s important to seek advice as to whether this is appropriate for you.

For qualified, professional advice, talk with Ian today on 3822 7201.

Ian Chester-Master is a Certified Financial Planner with over 20 years experience.

Ian is also a Director of Your Financial Design P/L. Your Financial Design Pty Ltd is a Corporate Authorised Representative (1233744)of Madison Financial Group Pty Ltd | AFSL No. 246679 | ABN 36 002 459 001

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Before acting on any information in this article, we recommend that you consider whether it is appropriate for your circumstances.  You should not act on any advice until we have fully considered your personal circumstances and provided you with a Financial Services Guide, Statement of Advice and Product Disclosure Statement/s.