Before we get started, can someone tell me what constitutes a holiday? My calendar reads that yesterday was President’s Day. My son’s school was closed on Friday (and yesterday). However, trash pick-up was on its normal schedule, to the surprise of 90% of my street. Later, I saw mail trucks driving down my dead-end street, but not dropping off mail at each house (maybe one of those Sunday Amazon deliveries.)
Enough with life keeping me on my toes, let’s get to the money.
You may have noticed that lately I’ve been writing about my net worth more than usual.
I’d like to tell you that it was part of a normal writing schedule. Honestly, it’s because the stock market has been going for nearly a decade now and my local real estate market is finally joining in.
During times like these, I try to remember two things:
- Don’t fall into the mental trap that markets will go up forever at this pace. They can’t and they won’t.
- I don’t control the markets. I’m a leaf on the wind. Watch how I soar. I can only go where the wind takes me.
With those caveats in place, let’s use my net worth over the last several years as an introduction to the Rule of 69, 70, and 72. (Regular readers are probably familiar with this rule, but I’d like to define it for beginners and have one place in the blog where I can refer to it whenever necessary.)
The Rule of 69, 70 and 72
While it is one rule, it comes across in many different forms. It’s helpful to understand that they are the same thing.
Rule of 70
You may have come across the “Rule of 70”, which says you can take 70 and divide by the expected interest rate to find out how many years it will take your investment to double.
Example: I am investing $100,000. I expect the investment will return 7%. I can expect that the money will double to $200,000 in "70 divided by 7 years..." or simply 10 years.
Rule of 72
This is the same as the Rule of 70, but 72 works better with numbers like 6, 8, and 9 which are often used as hypothetical investment growth percentages.
Example: I am again investing $100,000. I expect the investment will return 8%. I can expect that the money will double to $200,000 in "72 divided by 8 years..." or simply 9 years.
Rule of 69
It’s really hard to divide 69. It’s only two factors are 23 and 3. You aren’t likely going to be working with a 23% interest rate. The 3% interest rate is pretty well covered by the rule of 72. (No one is going to complain about the difference between an estimate of a 23 or 24 years, right?
So why the Rule of 69? It’s technically the most accurate. It is derived from the natural logarithm of 2 or ~.693.
And while the Rule of 69 can’t help us with quick estimations like 70 and 72, I like to include it because it shows that those numbers aren’t magical. (Also, you can see that 72 is a little less accurate, but it’s still very good.)
Putting the Rule of 69/70/72 to use
I was looking through my net worth chart at the end of the year and I noticed that it grew, on average, around 18% each year over the last 4 years.
Because I’m a crazy math nerd, those 18 and 4 numbers hit me over the head. Those are Rule of 72 numbers. My net worth had doubled. (No wonder I’m obsessed with Net Worth, right?)
Well, it didn’t exactly double. The numbers weren’t consistently 18% and it was the Rule of 72 (vs. 69). Still they were close enough.
This brings me back to the leaf on the wind point above. It would be great if one could simply say, “Hey I’ll order up a doubling of my net worth every 4 years. Thanks!”
It don’t work that way.
Doubling your net worth depends a lot on your net worth. When I saved $10,000 at age 23 it had a huge impact on my net worth (perhaps doubling it alone). Today, at age 40, my net worth is driving more by the markets. Don’t get me wrong, it’s still nice to save $10,000, but it isn’t going to double my net worth.
The higher the net worth, the more difficult it is to double… if you are relying only on savings.
On the flip side, investment gains can be huge. If a billionaire make 10% in the stock market in a year, it’s $100 million dollars. If you were to earn a salary of a million dollars a year (not a bad salary, right?!?!) it would take you a hundred years to do what that billionaire did in one.
It works the same way at the lower net worths… you don’t have to a billionaire. I just used that as an extreme example.
I realized that I just jumped in to talk about net worth in this article. The best software for tracking it is Personal Capital. Personal Capital is completely free. It can help you track all your financial accounts: banks, brokerages, loans, credit cards, etc.
When it comes to your net worth, I always say that you can’t get to your destination if you don’t know where you are to start. Personal Capital is a great tool for knowing where to start.
Where do you want to be 4 years from now?
I knew about the rule of 72 but somehow missed knowing about the rule of 69.3. Wikipedia says that 72 is better for simple interest and 69.3 for continous compounding.
Lazy Man says
That makes sense. I’d also say that 72 is better for doing math in your head while 69.3 works better when you have a calculator handy.
Rule of 72 gets you 2, 3, 4, 6, 8, 9
Rule of 70 gets you 2, 5, 7, 10
For me, it’s just much more convenient to do the mental math with the Rule of 72 – and it gives me a “good enough” answer almost all of the time.
If I want accuracy, I’ll use Excel. I have an amortization schedule for my mortgage that I can plug various amount of extra principal payments into to determine the effect on the length of the loan.
Lazy Man says
Is that a publicly available Excel amortization schedule? That sounds like a great tool. I could see it very motivating to throw $100 at it to shave off 40 days or whatever the math comes out to be.