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That's FijiAirways.com. From here to happy. Flying direct with Fiji Airways. Today on Medical Personal Finance we talk about the rule of 72. One of those very useful little mental math shortcuts that you can use to estimate the effect of various growth rates and calculate how long it takes you to double your money.

Welcome to Radical Personal Finance, the show dedicated to providing you with the knowledge, skills, insight and encouragement you need to live a rich and meaningful life now while building a plan for financial freedom in 10 years or less. Hey, guess what? If you're going to do 10 years or less, do you know how much money you need at the end of 10 years?

And do you know how long it'll take your money to double in 10 years? What interest rate you need to double your money in 10 years? That's why the rule of 72 is useful. Jumping back into the financial planning shows here today. I've been on hiatus for quite a while here on Radical Personal Finance.

Traditionally, I like to do Wednesdays as a financial planning show. And the reason for that – I know for some of you, financial planning shows have been your favorite. That was what brought you here to Radical Personal Finance. You said, "Hey, Joshua says he's teaching his way through the CFP curriculum and that has been my intention and my intent." And so that brought a number of you here.

What I learned in doing the financial planning shows is as measured by download numbers, meaning popularity of the shows, there tends to be quite a bit of variability among different shows. I know that some people are subscribed to the show where their phone, the app on your phone just simply automatically downloads every show.

But many people don't listen to every show. Many people just simply dip in and dip out when they want to and they choose based upon the title that sounds interesting to them. And so I can see the variability of different shows. I can measure what's more popular and what's less popular based upon the number of downloads of a show and that could just simply be what's more popular in terms of the title of a show or what's a catchier title, et cetera.

So I can also then judge the popularity of shows based upon the actual feedback that I get, the emails that I get, the comments that show up on the show page, et cetera. So traditionally, as I've been doing these financial planning shows, they have often been my least popular shows, some of the shows that have been downloaded the least and also from a preparation perspective, they take me the most time to prepare.

When I do some complex show trying to go over various types of annuities or types of life insurance, et cetera, in order to get that content clear and concise, it takes a tremendous amount of preparation time to do that. So I haven't had a huge motivation to follow through on these financial planning shows seemingly because the audience doesn't seem to resonate with them as much as with other topics and it takes a lot of time.

That said, it is still important to me to do so. And today, we're going back to my outline of certified financial planner topics and crossing off one here called the Rule of 72, just a quick little valuable – hopefully valuable tool and little piece of math, a little mental math shortcut that I want you to be equipped with.

That's the purpose of today's show as we get back to the CFP curriculum. I don't promise to give you one of these every Wednesday. I will do my best to do them consistently and I have some chosen but it's largely based upon what I'm able to do and when I'm able to do it.

So please be patient with me as I do my best to deliver the content for you on a consistent basis. The Rule of 72 is a mental math shortcut that you can use to calculate how long it will take a pot of money to double. It doesn't have to be money.

It just basically measures how long if you have a mathematical quantity that is going to be governed by compounding interest, how long will it take that to double or to have if you're going the other way. The way that you do this math is you take the number 72 and you divide it by the interest rate and you can generally do this in your head and get a good rough idea of how much money we're going to be talking about.

So very simply, if for example you think that you can earn 6% on your money, then you just simply take 72, divide by 6 and the answer of course that you get is 12, 12 years. Six times 12 is 72. So you get 12 years. That's how long it will take for your money to double.

$100,000 in the bank invested at 6% interest will equal $200,000 at the end of 12 years. If you want your money to double every decade, you can calculate what interest rate you require in order to accomplish that. So you would take as a simple example, 72 divided by 10 and that's 7.2%.

If you have a million dollars, you don't spend any of the money, if you can invest it at 7.2%, at the end of a decade, you'll have $2 million. And that process then could be repeated the following decade. Now of course compounding works against you the other way. If you're using this to compare an expense, for example something like inflation, then you'll see the effect go the other way.

On yesterday's – yesterday's show? Yesterday's show, I talked about – yes, excuse me, where I talked about the numbers of a million dollars value of 1998 when Tom Stanley first published his book The Millionaire Next Door. Here in 2017, I said that if you were a millionaire back then, you need a million and a half dollars to have the same purchasing power that you had back then.

Well, that's coming up on 20 years. And if you wanted to say, well, how much would it be to double? What if I had to have $2 million? What would an inflation rate be for me to have to have $2 million in 20 years? The answer would be three and a half percent.

72 divided by 3.5 comes out to about 20. So there's where we get our 20 years. It's a big deal because just a small move in inflation rates means that your money is losing value much more quickly. If inflation rate goes from 2 percent to 3 percent, which is a very normal calculation, the number that I used yesterday was I believe the inflation calculator I plugged that number into is like 2.5 percent, somewhere around there.

But if you used – if the inflation rate goes from 2 percent to 3 percent, that means that your money will lose half of its value in 24 years instead of 36. That's a decade. That's a big, big difference when it comes to inflation rates. Of course also you can use this for expenses that you may face.

So there's the cost of healthcare or the cost of college tuition. You can take that number. Let's say that cost of healthcare, cost of college tuition is going up at 5 percent per year, then that means that about 15 years from now, you're going to have double the expenses.

72 divided by 5 equals 14.4. So let's call that 15 years from now. Now why is this useful? It's useful because it has a way of translating something that we don't particularly know how to connect with, interest rates, into something that we do know how to connect with a little bit easier, money doubling and money doubling in a certain number of years.

If I talk about investment A that has the potential to return a 5 percent interest rate or investment B that has the potential to return 7 percent interest rate, depending on your familiarity with investing, that might or might not sound like a big deal. For most people, the difference between 5 percent and 7 percent doesn't sound like a big deal.

But the rule of 72 tells us that if we invest at 5 percent, our money will double in 14.5 years or if we invest at 7 percent, our money will double in 10.5 years. So we can see here that that small, relatively small 2 percent difference, when we put that into a compounding formula, it makes a huge difference on how quickly our money grows.

If you are 30 years old and you can double your money every 10 years versus every 15 years, that will make a huge difference in how much money you have at the age of 70. The person who is investing their money at 7 percent, thus doubling their money every 10 years, has the opportunity to have four entire doubles.

Their money can double over four times once per decade. The person who's investing at 5 percent, on the other hand, has 40 years investing, has the possibility of doubling their money only 2.78 times. So it's called 2.8 times. Well, when you think about, let's say you have $200,000 a day, $200,000 doubled four times leaves you with $3.2 million after the fourth doubling.

But if it's only doubled three times, that leaves you with $1.6 million after the doubling. This is a big deal, huge deal. I think personally I'm probably guilty of being somewhat cavalier when it comes to interest rates here on the show. I generally try to make conservative estimates and I use various numbers at various times, but I shouldn't be so cavalier and you shouldn't get the impression that there's a small difference between a 5 percent rate of return and a 7 percent rate of return.

There's a huge difference between those two numbers. It's a big, big deal. That's why when it comes to investing, everything matters. The fact that you invest the portfolio into an investment that has a higher probability for a high, excuse me, that has a high probability for a higher rate of return, something moving towards 7 percent or 8 percent or 9 percent or 10 percent because if you're investing in stocks and bonds because it's more heavily weighted to stocks, that's a big, big deal.

The fact that you choose CDs or money market account and don't invest in stocks, that's also a big, big deal. Expenses are a huge deal. If we use the rule of 72 and we say if you're getting a 6 percent rate of return, 72 divided by 6 equals 12.

Your money will double every 12 years. However, if we use a 7 percent because you can trim off a 1 percent worth of expenses, 72 divided by 7 means that your money will double every 10.29 years. Let's calculate the impact over a 40 or 50 year investment time horizon.

It could be huge, much bigger when you go longer than that, but let's just stick with 40 years. 40 divided by 12 means that your money could double 3.33 times at 6 percent, but 40 divided by 10.3 means that your money can double 3.88 times over the course of your 40 year investment career.

3.33 doubles versus 3.88 doubles is a big deal. Think about your money at the end of your investment career and just think about that number. Let's say it's a million dollars and think about the hundreds of thousands of dollars that are represented by another half doubling period. I'm getting a little tongue tied here with all these numbers in an audio format.

I apologize for that. I want to impress upon you the fact that interest rate matters. Expenses matter. Tax efficiency matters. All of these things matter. It's a little hard for many people to sit down with a spreadsheet, build a spreadsheet that's going to show the impact of various rates of return and being able to visualize it.

Sometimes it's a little easier for many people to recognize how quickly their money is going to double and how many doubling periods they can have. The rule of 72 will help you get there. I encourage you to use this. If you're ever wondering how long will it take money to double or how long will it take an expense to double, just take 72 and divide it by the rate.

Hopefully that will allow you to get around some of the problems of the money, the big numbers which are hard for our brains to conceive of and conceptualize. You'll be able to create a more accurate analysis for yourself. That's it for today. That's it for the rule of 72.

It's as simple as that. But I can check the box now on my curriculum that we've talked about the rule of 72 on the show. Thank you for listening to the show. For those of you who have been sending me voicemails for the episode 500 show, please keep that up.

You can send those to Joshua@radicalpersonalfinance.com. We're going to have a special celebratory episode for episode 500. If you'd like to contribute your voice to that, I would love it if you would do that. All you need to do is just simply pull out your phone, record a quick voice memo and send that to me at Joshua@radicalpersonalfinance.com.

Specifically just tell me how the show has impacted you. Tell your other listeners how the show has impacted you and what progress you've made in the last few years of listening to Radical Personal Finance. Please try to keep that to about two to three minutes so we don't bore your fellow listeners insufferably and that'll be greatly appreciated.

Two to three minutes would be perfect. While you're at that, please send me, if you would like to, feel free to send me a picture of you and your family. I've just got that set up on a screensaver on my computer so that way when I'm recording the show I get to look at all your beautiful family pictures.

I love seeing those. It helps me to visualize who I'm speaking to each day. That's so helpful. If you'd like to support the show, please consider becoming a patron of the show. Radicalpersonalfinance.com/patron. Radicalpersonalfinance.com/patron. I'll be back with you tomorrow. Bye. This show is part of the Radical Life Media network of podcasts and resources.

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