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The buying power of money: Why 72 is an important number in business

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The buying power of money is just like a toddler in a shopping mall, always heading off in some direction. Parents can at least control their children’s movements by strapping them up in a pram or one of those ridiculous pet-like leashes. When it comes to money, value is always on the move.
 
Unlucky for us, every country sits with an enemy that can wreck havoc on their economies – inflation. As you may well know, rising cost of living decreases the value of money over time. A $10 basket of goods today will be cost you a lot more in five or ten years.
 
This means that if you are serious about maintaining your standard of living in the future, you need to keep your money in a vehicle (investment or business) that at the very least keeps up or grows with inflation.   
 
There is a quick and easy way to determine how inflation erodes the value of money. It’s called the ‘Rule of 72’, and it gives you a rough estimate of how long it will take to specifically halve your money’s buying power.
 
The rule is expressed as a simple formula:
 
 
Number of years to halve = 72 ÷ Inflation Rate
 
For example, if the inflation rate in your country is 5%, your money will lose half its value in about 14 years (72 ÷5). At 10% it will take just over 7 years (72 ÷ 10).  
 
The “Rule of 72” is useful for making other financial estimates. It can tell you how long it will take for an investment to double in value at a certain interest rate or return on investment.
 
To find the number of years, you divide 72 by the return like in the formula above.
 
 
Number of years to double = 72 ÷ Interest Rate
 
For example at 6% interest , it will take you 12 years to double your money (72 ÷ 6) whereas at 15% it will take almost 5 years (72 ÷ 15). A 30% investment return will see the buying power of money double in about 2.5 years (72 ÷ 30).
 
You can also work the rule the other way around. What investment return do you need to double your money after 5 years, and after 1 year? After 5 years you need a return of 14% (72 ÷ 5) and after 1 year a return of 72% (72 ÷ 1).
 
The rule is quite clear about wealth creation. The higher the return on your business the sooner you will be able to achieve financial freedom. Your job as a business owner (or wealth creator) is to acquire or build assets that generate your required return.
 
So if you want to double your money after one year, you need an asset that delivers 72%, which isn’t difficult to find by the way. You have to know what to look for and where to find it.
 
The usefulness of the “Rule of 72” doesn’t end here. It can be applied to any situation that has a growth rate:
  • If a company’s sales increase at 10% per year, sales will double in about 7 years (72 ÷ 10).
  • If the world’s population grows at 3% per year, the number of people will double in 24 years (72 ÷ 3).
  • If the number of fish in the Pacific Ocean decreases by 4.5% every year due to commercial activity, the ocean’s fish supply will halve after 16 years (72 ÷ 4.5). 

Cheers for now!

Rule of 6 book