How do you make a million dollars? Well it is easy, just get hold of $500,000 and double it.
If you don’t have $500,000 then get $250,000 and double it twice.If you don’t have $250,000 get $125,000 and double it thrice etcetera.
Yeah right! I here you say in dismay. (Keep reading.)
There is: no magic bullet no fool proof quick buck idea to making a million dollars
There is just you, your motivation and your understanding of how money works and then you must…. work it.To work it you must implement, consistently and persistently the best kept secret in the world. Compound Interest
“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” Albert Einstein
Money Mechanic #1 The rule of 72.
Behind the compounding effect and how it works is the rule of ‘72’.
72 is a quirky little number that when you divide it by the interest rate, earning rate, growth rate or inflation rate the resulting figure is the number of years it will take to double your money at that rate.
Let us say you could receive 7.2% interest every year on your invested money and you reinvested the interest. That is, you didn’t withdraw the interest when it was paid but you left in in your account. Now you are earning not only interest on your initial deposit but also interest on the interest you left in the account. This is called compounding the interest.
By doing this consistently and persistently over 10 years, that is you haven’t taken a cent, your initial deposit will double in value, an increase of 100%.
For example, if your initial deposit was $1,000 it would double to $2,000. If it was $500,000 it would double to $1,000,000
Conversely if you wanted your money to double in 10 years you would need to get a return of 7.2%
Suppose you had $62,500 to invest and you could get 7.2%. How long would it take for you to get your $1,000,000?
Let us do the math. If you your money doubles every ten year at 7.2% then in 10 years, the $62,500 would have doubled to $125,000. That is once.
In another 10 years, the $125,000 would have double to $250,000, that is twice,the next 10 sees your money doubling to $500,000 that is thrice and the next 10 years it doubles to $1,000,000. That is the fourth time it doubles
How many years is that? 40. So it takes $62,500 to double four times to get $1,000,000.
Ok but forty years is a long way off? I will be retired or dead by then I hear you say.
Putting the important detail of how to obtain returns aside, let us focus on the mechanic of the rule of 72 and calculate how to obtain a million dollars a lot sooner. What returns do you need to obtain your objective over a given time frame.
What if you could get 10.3% instead of 7.2%? Your money doubles every 7 years and not ten.
$62,500 doubling four times would therefor take 28 years (4x7 years=28 years) and not 40. Meaning you get your million dollars fourteen years earlier. But still 28 years is a long time to wait.
Ok let us dial it up
How long would it takes to get a million dollars if you could get return of 20% could achieve.
Applying the rule of 72. Divide 72 by 20. The answer is 3.6 years. 3.6 years’ times 4 is 14.4 years to get your $1,000,000.
Here are tables.
If you can receive an extra 3.1% more than 7.3% you would get 10.3%.
3.1% seems a small increase. However over 20-21 years it produces an extra 100% more. WOW! What???
Is it worth getting to know how this money stuff works? 100% more in 20 years is a huge price to pay for ignorance and complacency.It is also a great reward for effort, consistency and persistency.
But wait there is more! How would you like your $500,000 not in 20 years but in 10? That is start at age 20 and by age 30 you have a huge deposit for a house.
Read the next blog for Money Mechanic #2 How to someone else’s money to make money.
Conscious Money blogs – your money insight and skills centre.
Conscious Money Pty Ltd ABN 15 162 000 562 is a Corporate Authorised Representative of Madison Financial Group Pty Ltd ABN 36 002 459 001 AFSL No. 246679. This information is of a general nature only and neither represents nor is intended to be specific advice on any particular matter. We strongly suggest that you seek professional financial advice before action.