If you have adolescent or young adult children that you think would benefit from some easy-to-understand financial guidance, teach them about the rule of 72. The Rule of 72 is a financial tool that can provide an investor an estimate of how many years it will take to double their investment simply by dividing 72 by an estimated fixed annual rate of return. For example, an investment with an annual rate of return of 7.2% would double in value in 10 years (72/7.2).
Good financial and saving habits start early and explaining to your kids the basics of the Rule of 72 can help your kids to achieve long-term financial goals. While seeking to obtain an annual rate of return of 7.2% within an investment portfolio, investing $5,000 today would result in that portfolio growing in value to $10,000 in 10 years, to $20,000 in 20 years, to $40,000 in 30 years, and to $80,000 in 40 years. Similarly, if you are looking to retire in 10 years and your retirement portfolio has a current market value of $1.5M; by choosing the right mix of investments to achieve an average annual return of 7.2%, your portfolio could potentially increase in value to $3.0M by the time of you retire in 10 years. And that amount is prior to accounting for any additional contributions that you and your employer would be making to your retirement plan over the next 10 years while you continue to work. And assuming that you are age 50 or older and funding the maximum allowed salary deferral per year ($30,500 for 2024), then your $1.5M retirement portfolio could have the potential to grow to $3.5M over this 10-year time horizon.
