Some very important math lessons
Ellie Glasscox taught me math. As a football coach at Thompson High School long ago, he also had a class load, leading us through Algebra and other math mysteries.
One of the things I learned in his class that I use almost every day as an investment advisor is the Rule of 72: Take any compounded rate of return, divide it into 72 and you get the number of years it takes to double your money. Working backwards, you can decide how long you have to double your holdings. Divide that into 72 and you find out the rate of return you need to get on your investments.
So, if you want to retire in ten years with $1 million and have $500,000 now, you need to double your money over that period. Divide 10 into 72 and you get 7.2 percent. That is a reasonable rate to have as a goal, but you will need to invest for growth. That usually means taking risk in the stock market.
The Rule of 72 has another use: how long will it take inflation to cut your buying power in half? Let’s assume inflation averages 8 percent in the time between now and the next recession. That means in 2018 the average loaf of bread you buy will cost $5.48.
Add in the costs of paying taxes and you can see you need to be serious about growing your savings in a responsible way if you are going to stay ahead of the game. Gains are good but losses hurt a great deal. Sitting around and waiting for the market to do you a favor may not be the best strategy. In any event, you must know where you want to go and what it will take to get you there.
All the really important math you can do in your head: At the age of 20, assuming a 7.2 percent compounded annual return goal, you have time to double your money four times before age 60. At that rate, $10,000 invested today ends up $160,000.
A 50-year-old with good savings, no debt and productive investments would need to earn a compounded rate of return of 4.8 percent to double his money by the magic age of 65.
Who said we would never use math in real life? Thanks, Coach.