To better understand how rich people get richer, let’s take a look at “The rule of 72,” a mind-boggling wealth-building concept that the world’s top investment brokers teach their rich clients. The Rule of 72 is a simple formula for calculating how many years it would take for an investment to double.
Here’s the way it works.
Doubling Concept or Rule of 72
1) Determine the annual interest rate on your investment
2) Divide the interest rate into 72
3) The result is the number of years it takes for your investment to double
For example, let’s say you invest 10,000,000 in a fund that pays an annual return of 10% per year. Here’s the Rule of 72 in action:
Rule of 72 in Action
Step 1: 10,000,000 original investment
Step 2: 10% annual return
Step 3: 72 divided by 10 = 7.2 years
Profit: 10,000,000 would become 20,000,000 in 7.2 years
If you don’t spend the profits or the principal, the original investment of 10m would double to 20m in 7 years… to 40m in 14 years… to 80m in 21 years… and 1.2 billion in 49 years… and on and on. As you can see, the longer the money is allowed to compound, the bigger the size of the nest egg. If you bequeath this fund to your children who then bequeath it to their children, you will in effect break the curse of poverty in your family line.
This here is the crucial point of how rich families keep getting richer. They have built assets that keep on compounding over generations. And you too can do the same. Simply set aside 15% to 20% of your gross income every month and invest it wisely in great assets, such as stocks, bonds, closely-held businesses, rental property, commercial real estate, pension funds, and the like for a very long time.
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