The Rule of 72
During several of meetings with clients during each year, a client will ask me a question about how much money they will have in a number of years. Sometimes, for fun, I will try do this in my head and I will generally be very close.
For example, they will state they have $100,000 to start with and they expect to earn 6% and have the funds for about 25 years. About as fast as they say this, I will state that they will have a slightly more than $400,000. They are always surprised how fast I can give the answer. There two simple reasons why I can do it. Reason number 1 is my mother was very good at doing math in her head and passed it down to me. Reason number 2 is the rule of 72.
This rule states that your money will double in years based upon what your expected interest rate will be divided into 72.
For example, if you expect to earn 6% on your money, it will take about 12 years to double. If you earn 8%, it will take 9 years and so on.
For the example shown above, if we start with $100,000 at 6%, it will take about 12 years to double to $200,000 then another 12 years to double again to $400,000. Compounding it at 6% for another year will total about $425,000.
Try this on your farmer friends and guarantee that many will know the rule of 72 already.
Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Walla Walla, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
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