In this episode of the Equity Compensation Guidebook, I'm taking a break from talking directly about equity compensation. However, I'm staying within the world of personal finance, so don't tune out just yet. The topic today is the rule of 72. Rule may be a strong term, it's more of a guide. But everyone calls it a rule so that's what we're going with here. The rule of 72 has to do with compounding, and what's more fun than the power of compounding, right?
You will want to hear this episode if you are interested in...
- How long will it take to double your money? [1:31]
- This week’s FLASHBACK [4:07]
What is the Rule of 72?
It's a simple calculation of how long it takes for an investment to double based on its rate of return. Again, it isn't really a true rule. It's more of a guideline as it is not exact, but as the expression goes close enough for government work.
How does the rule of 72 work?
Take the number 72, then divide it by your rate of return. This will get you close to how long it will be before your investment has doubled in value. For example, if you invest a dollar and are enjoying a 9% rate of return it'll take eight years for the $1 to turn into $2. Technically. it will take 8.04 years. It does get a little less exact the further your rate of return moves away from 9%.
A 100% rate of return takes one year to double. If you were to follow the rule of 72, you would calculate it to take 0.7 years. On the other end, if the rule of 72 were exact a 2% return would take 36 years to double. In reality, it takes 35 years. So a full year off. Regardless, the rule of 72 is a simple way to estimate how long before your investment may double.
This week’s FLASHBACK: That Cedar Point Summer
In today's flashback, I figured I would share a bit more about the best summer job I ever had. It was of course when I worked at Cedar Point. I was hired to run the whitewater landing, which is a water ride. The park had been open a few days before I arrived.
Unfortunately, when I arrived, I found out my position did not exist. Apparently, they would over-hire every year as many hires didn't show up. I guess that year everyone showed up at least for that ride. So they moved me over for the Jr Gemini area. Yes. I ended up working kiddie rides. I was annoyed until I realized it was me and a dozen girls, not a bad deal.
After about a month, my supervisor said they needed people to work on the train. She said it was more hours and less direct interaction with the guests. More hours were key for me as I was trying to earn some more money for school. So I went from being hired to work water rides, to running a kiddie coaster, to working as a fireman on a steam locomotive. Yes, my title was fireman as I threw coal in the fire.
My two roommates did not finish out the season. One quit a few weeks in and the other quit with only bonus weekends left. Bonus weekends were when you worked the weekends in September, you would get a nice bonus based on the total hours to work during the summer. His bonus wasn't too big, but mine was from working all the hours on the train. Regardless, it's still the best summer job ever!
As always, thanks for taking the time to read this. Please do not hesitate to reach out if I can be of help with your equity compensation-related questions. The easiest thing to do is to click the little green box that reads “Schedule a Meeting” that can be found at the bottom of every page on my website. Or, just click my Calendly link right here.
I’m Dan Johnson, CFP®, founder of Forward Thinking Wealth Management. I run a flat-fee financial planning and investment management firm located in beautiful Akron, OH. Although I am in Akron, OH, I work with clients regardless of location. I cater to owners of equity compensation positions who are looking to organize their financial lives, keep more of what they make, and do the things they want in retirement and even now.