Dec. 30, 2022

The Simple Rule of 72 And How To Stop Spending $120 for Lunch

I think about money a lot and am constantly scheming about ways to increase my income, my investment returns and optimize my financial life. Often I reflect on my current net worth and investment portfolio and run through various future scenarios and try to calculate how quickly it will grow. The rule of 72 comes in handy for this, but is sometimes a bit too complex to run through to get an exact number in my head. Luckily, there is a way to simplify this equation to do rough math.

My Simple Formula

This is an approximation, as I mentioned, but the math works out to show that 7’s and 10’s are connected and nearly inverse of each other.

  • If an investment returns 7% interest, the money will double in approximately 10 years
  • If an investment returns 10% interest, the money will double in approximately 7 years

Knowing this inverse relationship between 7’s and 10’s makes it really easy to project future outcomes. Coincidentally, stocks have averaged 10% a year the last several decades, but factoring in inflation, the net rate of return is 7%. Similarly, the crowdfunded real estate platforms I invest in offer 10% APY. It is also worth noting that 9’s and 8’s are exact matches in this formula

  • A 9% return will double in 8 years
  • A 8% return will double in 9 years
rule of 72
Double your money as fast (and as long) as you can

Why Are You Spending $120 On Lunch Every Day?

Having this framework of money doubling every 7-10 years brings another issue into focus, where the average dollar you have today could easily be worth 8x more than you think it is. Take a look at this fancy table:

YearsDollars Future Value

For example, the median age in America is 38, which is 20-30 years away from normal retirement. It is important to see your dollars as what they can become, rather than what they are today. So if you are spending $15 on lunch three days a week, that rounds out to $2,250 a year. Retirement is still 30 years away, which seems pretty far. Looking at the chart above, you can see that every dollar you have today is actually worth $8 dollars. So let’s do the math:

  • $15 x 8 is $120 – a hefty price tag for lunch. Is it worth it?
  • $2,250 for the year is actually worth $18,000 to your retirement.

I don’t know about you, but trading $2,250 dollars for $18,000 sounds like a heck of a deal to me. If you are younger than the median age, your money today is even more important. Your dollars could potentially be worth 16 or 32x what they are today, if invested properly.

Imagine Every Dollar You Have is Actually Worth $8 Dollars

I recently had to purchase a vehicle, which is an important decision because cars go down in value. We originally budgeted up to $5,000 and were looking at used Toyota Corolla’s and the like. This would have cost us about $40,000 in potential earnings by not investing this money instead ($5,000 x 8 = $40k). After looking at cars for a little while we came across a screaming deal from someone in our congregation, a 2003 Chevy Blazer for just $550. It was mechanically sound and well maintained, with low miles, and only cost me $4,400 in future value ($550 x 8). This is a huge win in the long run.

Do you ever plan to retire? Realize that the money you have today could be worth so much more, if you didn’t buy the latest gadget, clothing or car. If you are 40 years away from retirement, start multiplying your expenses by 16, and see if you really can afford to part with that money. The rule of 72 is really powerful and helps motivate me to curb spending and maximize my investments. I hope it will help you too.