Sean Sparkman: Perseverance and wealth- what the “Rule of 72” teaches us.

(this article is based on an excerpt from Sean’s upcoming book: Income-Do:The Way of Mastering Money and Your Life. )

“Instant gratification is bad for your health and your wealth.”  Sean Sparkman

 by Sean Sparkman

Many people, myself included, find they struggle with the concept of delayed gratification, at least occasionally.  Most of realize that patience and persistence are what allow investments to grow and plans to unfold properly.  Unfortunately, we live in a society that emphasizes constant achievement, quick fulfillment and instant satisfaction.

In 21^st Century America, you don’t hear too much about the virtues of patience and persistence.  Yet, it these qualities that allow successful people to fully harness the power of time as it relates to wealth management and income creation.  The ability to remain persistent in spite of challenges and setbacks, along with the patience to wait for long-term results, is what separates the financially successful from the rest.   The value of persistence when it comes to money is illustrated dramatically in the phenomenon of compound interest.

Albert Einstein famously described compound interest as the “8^th Wonder of the World.”  That may even be understating its crucial role in wealth accumulation.  Compound interest yields exponential growth over time.  That’s why I encourage my friends, family, and clients to start their retirement plans as early in their lives as possible.   One of the concepts I like to discuss with them is the “Rule of 72,” a financial idea first described by Italian mathematician Luca Pacioli in 1494.

You’ve probably heard of the “Rule of 72.”  It’s a valuable tool for projecting interest rates and time in relation to a person’s financial goals.  By dividing either years or interest rates into 72, it’s possible to estimate the time it takes for a certain investment to double or the interest rate you’d need to make this doubling happen.

The “Rule of 72,” while it is only an approximation, is still one of the more useful rules of thumb.  It’s a guideline which underscores the importance of time and persistence in wealth accumulation and highlights the exponential growth of compound interest over extended periods.

How does the Rule of 72 work?

To best explain the “Rule of 72,” we should use an example.  Let’s say Dan invests $1,000 at an annual fixed interest rate of 10%.  According to the Rule of 72, it will take around 7.2 years for Dan’s investment to grow to $2,000.  Bear in mind that this calculation isn’t exact (in reality, it would take 7.3 years to double) it still provides a useful ballpark figure and can help you make better decisions when it comes to investing.

The chart below illustrates the accuracy of this rule of thumb.  It compares the estimated doubling time you get when applying the Rule of 72 with the mathematically-derived actual number of years it takes for an investment to double at specific rates of return.

As you can see in the chart, the Rule of 72 comes pretty close to the actual most of the time.  It’s especially accurate for lower rates of return, typically between 5 and 10%.   You should understand though, that the Rule of 72’s accuracy tends to diminish if you use rates outside this range. If you enjoy getting truly nerdy, you can use the Rule of 69.3 instead.  Adjusting to 69.3 will bring you closer to the mathematical formula for compound interest.  This will make it more precise, especially if you are looking at continuously compounding interest rates.

Also, you should realize that although the Rule of 72 is great when looking at fixed rate investments, you can’t really use it with stocks because they don’t have fixed rates of return.    However, you could still use it to figure the average annual return you’d need to double your money within a certain

Persistence Summed Up: The Rule of 72 demonstrates mathematically the value of patience and persistence when it comes to finances.   But, in our modern culture, where instant gratification is prioritized at the expense of common sense, waiting patiently can feel impossible.

Embracing persistence and patience requires a deliberate and necessary shift in one’s thinking and the willingness to place long-term goals ahead of immediate desires.  Taking some steps to cultivate these virtues will, however, help you stay focus and achieve things with your wealth that would otherwise be impossible.