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Financial Planning

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September 15th, 2020

The Rule of 72

Many older people will tell you, “start saving early”.  

Rarely though, do they tell you why.  

The answer is quite simple - as Einstein referred to it, the reason is because of the power of compound interest over time.

The power of your money staying invested and accruing interest on interest leads to massive growth over time.

The Rule of 72 is used to help break this down as well as calculate how long it will take your money to double.  To find out how long it will take you to double your money, simply divide 72 by your average annual return on your investment.  Since the stock market varies year to year, the longer you are invested, the higher the odds are your average return will be higher than someone who was not invested for as long.  This is due to the law of averages.

  • Since its inception in 1928, the S&P 500 has averaged just under a 10% return before adjusting for inflation (typically around 3%).  

If history stays true, someone who invests just $10,000 in their brokerage account at age 25 in a fund tracking the S&P should have over $450,000 at age 65 if they do not withdraw any money along the way.  

Better yet, if someone can invest $10,000 every year from age 25 to 65 they could have over $4,000,000 at age 65.  

However, If that same person waited until age 45 to start saving, by age 65, they will only have roughly $500,000.

We’re here to teach you how to be the $4,000,000 person and not the $500,000 person.

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