How do you make a million dollars? Well there is no magic bullet, there is just you, your motivation and understanding of how money works and then you must…. work it.
To work it you must utilise compound interest, and before I go on, be prepared to slowly digest a bit of maths.
“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it” – Albert Einstein once said.
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, earnings rate, growth rate or inflation rate, the resulting figure is the number of years it will take to double your money at that rate.
Suppose you had $62,500 to invest and you could get 7.2 per cent. How long would it take for you to get your $1,000,000?
Let us do the math. If your money doubles every ten years at 7.2 per cent then in ten years, the $62,500 would have doubled to $125,000. That is once.
In another ten years, the $125,000 would have double to $250,000, that is twice, the next decade sees your money doubling to $500,000 that is thrice and the next ten 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? Yes, so let’s calculate how to obtain a million dollars a lot sooner.
What if you could get 10.3 per cent instead of 7.2 per cent? Your money doubles every seven years and not ten.
$62,500 doubling four times would therefore take 28 years (4×7 years=28 years) and not 40. Meaning you get your million dollars twelve 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 per cent 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 per cent more than 7.3 per cent you would get 10.3 per cent.
That 3.1 per cent seems a small increase. However over 20-21 years it produces an extra 100 per cent more. WOW! What???
Is it worth getting to know how this money stuff works? 100 per cent 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.