Rules, rules, rules. They are all around us and yet we don’t quite follow a lot of them. We are told to respect everyone including the environment but we don’t. We are not supposed to jaywalk but we do. Or at least I did a few times. But then there are rules that you must at the very least pay attention to because following them could literally change your life. And the big amongst them is the rule of 72. But why 72? Why not 50 or 14? With a bit of math and the compound interest formula, you get to this simple rule where if you divide the number 72 with say a given annual rate of return, you get the number of years it would take to double your money. Or you divide 72 by the number of years it took you to double your money and you get the required rate of return.
Now that you’ve got that right, a few obvious things first. If the rate of return is higher, your double will happen quicker. On the flip side, if it took you a lot less time to double your money, you know that you earned a high rate of return. So it would take a lot longer to double your money if it grew at a rate of 2% a year as compared to say 10%. And with this rule of 72, you can see that $100 growing at 6% will take 12 years to double (72/6). At 10%, 7.2 years and at 12%, 6 years.
Okay, you’ve got that now so how do you use this nifty little rule in helping you make daily spending decisions? Say you are 15 and a new gadget you desire just came out and it costs $250. You worked hard and earned and saved enough money to buy that gadget. No issue there. But that last year model you own works just fine but regardless, you go in for the kill. I mean you buy it. But was it really worth spending 250 bucks for a new one? Granted, it runs a bit faster, looks a bit nicer but was it truly worth it?
And what happens to the one you already own? It gets recycled, hopefully. Most likely, it’ll end up in a landfill. And then over time, that thing starts to decompose if it ever does. And the chemicals from that thing start to leak into the water (#savetheturtles) which at some point finds its way through the tap, into your Hydro Flask and into your body. So all bad.
But I digress, that money I just spent and almost destroyed the environment in the process could have instead been used for a more worthy goal. Like to fund a business idea to clean the environment in say ten or twenty years which by then, I would hopefully know enough on how to do it. Or say to someday be able to not work for money at all and work because I want to make a difference. So at 7%, that same 250 bucks would turn into $500 in 10 years. How did I get to that so quick? That rule of 72 (72/7 ~ 10 years) again. 10 more years and we are talking about another double. In 40 years, that same 250 bucks that I had no reason to spend to replace a perfectly working gadget at 7% would be 8,000 BUCKS. So I had a choice and I blew it.
And I am not implying that you need to become a monk and give up on things. All I am saying is to be conscious about how and what you spend your savings on and how it’ll impact your future and the world.
My advice, if you are about to buy anything that feels discretionary is to not buy it on the spur. Give it some time and come around in say a couple days and see if you still feel a need for whatever you were about to buy. If yes, buy it. If not, even better.
And don’t forget the rule. Keep a rate of return in mind and see how many doubles you are missing out on if you don’t defer that purchase. Your future will be bright and so will be our world.
Until later.
Cover image credit – Artem Beliaikin, Pexels