Imagine this. You’re standing on a beach in some remote area of the world. The surf is washing over your feet. Saltwater sticks to your skin. You feel warm and at peace with your environment. There’s no boss breathing down your neck. No phones ringing. Every minute of your day is yours to do with as you please. That’s right, you get to spend your time the way you want! For many people stuck in the suck of some soul-deadening 9 to 5, this dream might seem unfulfillable.
Don’t allow yourself to believe that. Those who have researched and followed through on their FIRE (Financial Independence Early Retirement) goals have already proven that the dream is not only achievable but also rather simple. Countless young men and women have already done it and so can you! There’s no magic pill. No genie in a bottle. All it really takes is a small amount of discipline and some down-to-earth investment strategies.
Let’s say you’re already on the journey toward FIRE. You have a decent chunk of change in your portfolio, and you know your general compounded interest rate. So how do you figure out when you’ll have enough money to kiss that job goodbye and live the life you’ve always dreamed of living?
Easy as cake. Just follow the “Rule of 72!”
The Rule of 72 is a simple algebraic equation that anyone can use to determine how long it takes for an investment to double when receiving compound interest. Compound Interest happens when the interest you receive from an investment is automatically re-invested, creating a snowball effect that will move you toward your early retirement goals at break-neck speed.
Okay. So let’s do some easy math, shall we? Don’t worry. If you passed high school algebra with a C- then you can complete this equation in 15-seconds flat. All you need is the calculator already built into your smartphone. Here’s how the “Rule of 72” works.
R (rate of growth) x T (time in years) = 72
That’s it! Just take the average interest you’re receiving on your investment portfolio and plug that value in for R. Let’s say it’s a steady 5%, which is pretty normal for a typical index fund. Then it would look exactly like this:
5 (rate of growth) x T (time in years) = 72
Now, you just need to solve for T (time in years). Again, don’t panic! Just type the following into that trusty calculator and it’ll do all the work for you. Here’s how you solve for T:
T = 72/5 so, that means T = 14.4 years
There you go! With this simple “Rule of 72” you can figure out how long it will take to double your current investment and start living the dream life. “The Rule of 72” is one of your first steps toward awareness. It tells you how long it will take based on your current trajectory.