Lessons We Can Get From The Rule Of 72
The Rule of 72 is just an eye-catching name for the concept of compounding interest. It is a very simple mathematical formula that clearly presents how money grows. Compounding is simply generating interest on your money and then investing said interest. The Rule of 72 demonstrates very clearly how this is accomplished.
Let’s look at some lessons we can learn from the Rule of 72.
1.) Money is like a fruit tree - You don’t plant a tree on day 1 and expect a fruit on day 2. It takes time for money to grow and bear fruit just like a fruit tree does. The Rule of 72 teaches that the more time you give your money to “compound”, the more money you can expect in return. I will have more illustrations for this in my next post.
2.) Interest rate is the key - The Rule of 72 teaches that the higher the interest rate, the faster your money will double, and the faster it does, the more money you earn. Especially if you keep your money invested for a long period of time.
3.) Money does not grow on trees - This saying simply means you cannot make money without working for it. Nothing ever comes in life free - definitely not money. The Rule of 72 teaches that to get more money out of what cash we have, we need to exert all effort to get the highest interest rate possible while ensuring that we do not carelessly engage in risky transactions or business deals that seem too good to be true.
4.) Make money work hard for you - Instead of us working hard for money, we should make our money work hard for us. I fully agree. That’s what we should do in order to gain financial freedom. Money, unlike man, doesn’t get sick, doesn’t get tired and doesn’t complain. The Rule of 72 which is about the concept of compounding interest, teaches us that interest begets more interest when re-invested.
5.) The concept of the “Automatic Money Machine” - The Rule of 72 fully supports a powerful concept in personal finance called Passive income. Personal finance experts talk of two kinds of income: active income and passive income. An example of active income is your day job where you have to be physically present and doing some work for your boss in order to earn your salary. Passive income is an “automatic money machine” where you don’t have to do anything to earn an income. You just sit there and watch money come in. However, passive income does not start automatically. You need to do something at first, after which you will start to reap the benefits and just wait for money to come in. Interest income is a good example of passive income - your money earns interest without your doing anything to earn that interest. The Rule of 72 demonstrates what passive income is.
The above key lessons in investment, business and personal finances are powerful and practical applications gleaned from the Rule of 72. They have led me to call the rule as the foundation for all investing.
To learn more about the Rule of 72 visit the blog of Zigfred Diaz at www.zdiaz.com
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