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"Take a simple idea and take it seriously." - Charlie Munger The Rule of 72 is one of those crazy simple ideas that permanently changed my life for the better. And that is because twenty two years ago, I decided it was one of those core bedrock hacks! The Rule of 72 is a very quick (and surprisingly precise) method of figuring out how long it takes to double your money at various rates of return. I'll let the eloquent Professor Peter Rodriguez explain: https://www.youtube.com/watch?v=12FsjiVzTMA It does pay off (bigtime!) to know the Rule of 72. It is one of the most important tenets for us diehard compounders . Warren Buffett had probably mastered this rule before his 10th birthday. He knew he was going to be the richest person on the planet decades before he got there. He knew his rate of compounding, knew his life expectancy - and didn't need to know anything else. "Compounding is the 8th wonder of the world." - Einstein We, the compounders, agree with Einstein. It is all about the doubles. How long does it take to get a double and how many doubles can I get in a lifetime. And the Rule of 72 lets you do all the doubling math in seconds in your head.
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The key to getting wealthy over a lifetime, even with modest income rests on three basic tenets:
1. Spending less than you earn. 2. Investing your savings in a low-cost index fund. 3. Starting very early. In you early 20s. This site does not have much advice for you on how to spend less and save more, but my twin brother, Mr. Money Mustache does. Check out: www.mrmoneymustache.com/ Please view this entertaining (and highly educational) video: https://vimeo.com/183016901 And finally, here are Mr. Money Mustache's real 2013 and 2014 expenses: www.mrmoneymustache.com/2015/01/16/exposed-the-mmm-familys-2014-spending/ Consistently spending waaaay less than you earn is the most important of the three tenets. It provides us our critical compounding raw material. After that it is just a matter of how long the runway is (how many years) and the speed you're going (rate of compounding). Savings is the most important of the three. |
Mohnish PabraiMohnish Pabrai is the founder and Managing Partner of the Archives
November 2023
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