The Rule of 72 Explained - How to Double Your Money

WEBVTT
00:00:08.960 --> 00:00:12.000
Welcome everybody to the Directed IRA podcast.
00:00:12.080 --> 00:00:20.559
My name is Mark Kohler, and I'm here with the infamous Matt Swanson, CEO of Directed Trust Company and author of the Self-Directed IRA handbook.
00:00:20.879 --> 00:00:21.440
Third edition?
00:00:21.600 --> 00:00:23.039
Is it the third edition's out, right?
00:00:23.519 --> 00:00:24.480
Third edition's out, yeah.
00:00:24.559 --> 00:00:25.199
Go get your copy.
00:00:25.280 --> 00:00:27.280
It's on Amazon or MattSorwensen.com.
00:00:27.519 --> 00:00:29.120
Wow, a little shameless plug there.
00:00:29.280 --> 00:00:44.960
Today we are going to explain the most incredible tool in building your retirement account, and it's an algorithm, a calculation, an equation, a method of madness that will blow your mind.
00:00:45.200 --> 00:00:46.240
Matt Sorensen.
00:00:46.479 --> 00:00:51.679
Have you heard of the rule of 72 and how your money doubles over time?
00:00:52.159 --> 00:01:07.920
Well, I think this rule is the easiest thing to have in the back of your mind you're investing, compounding, growing money, whether this is your IRA, your 401k, your HSA, your brokerage account, any asset, your real estate investments, I don't care what it is.
00:01:08.239 --> 00:01:10.000
How is that money growing over time?
00:01:10.079 --> 00:01:16.560
Well, it's the rule of 72 you should have in the back of your mind and thinking about as you're penciling out deals and investment opportunities.
00:01:16.719 --> 00:01:18.560
And we're going to break it down in today's episode.
00:01:18.799 --> 00:01:23.519
Well, as we go throughout this discussion today, I want to give you a visual.
00:01:23.760 --> 00:01:25.840
And I love the visual of a snowball.
00:01:25.920 --> 00:01:40.239
And I frankly, I've got to give it to the man, the myth, the legend, Dave Ramsey, because he is taught in a modern setting today probably the concept of interest and the power of interest more than anyone else I know.
00:01:40.480 --> 00:01:43.680
And it clicked for me when he used that snowball example.
00:01:43.760 --> 00:01:53.760
I want you to think of the incredible, infamous movie Willow, directed by Ron Howard, his breakout movie with Val Kilmer, who played Mad Martin.
00:01:54.079 --> 00:02:04.079
Now, in that show, he's being chased by the bad guys and jumps off a cliff in the snow and with Willow, and he starts to turn into a snowball as he goes down the hill.
00:02:04.400 --> 00:02:07.359
For anybody that's seen this, it's quite amazing.
00:02:08.319 --> 00:02:15.039
But but the uh physics of this is every time that snowball turns over, it gets more and more snow.
00:02:15.280 --> 00:02:28.879
And so, although it was the size of Val Kilmer when he jumped off the hill, it quadrupled in size because every time it turned over, it gained more snow, even though it was only one turn of the snowball.
00:02:29.039 --> 00:02:38.639
And that's the power of 72, as we explain it here, is that snowball is only going to turn over once, but how much snow are you going to collect when it turns over?
00:02:38.879 --> 00:02:40.879
And that's the visual I want you to think about.
00:02:41.120 --> 00:02:48.000
Yeah, and I think um Albert Einstein, Mark's going to Willow, I'm and Steven Spielberg, I'm going to Albert Einstein, okay?
00:02:48.240 --> 00:02:54.240
Albert Einstein is famous for saying compounding interest is the eighth wonder of the world.
00:02:54.479 --> 00:02:56.879
He who understands it earns it.
00:02:57.120 --> 00:02:59.039
He who doesn't pays it.
00:02:59.280 --> 00:03:04.000
Now, as we're thinking of investing, we're thinking of investment returns.
00:03:04.080 --> 00:03:10.400
This is interest, what you're making, and how it's going to grow over time each year is compounding.
00:03:10.560 --> 00:03:10.960
All right.
00:03:11.120 --> 00:03:16.800
So what the rule of 72 does is you say, all right, what is my return on this investment?
00:03:17.360 --> 00:03:22.240
Interest, think of it here, let's say 10% rate of return, 10% interest.
00:03:22.400 --> 00:03:22.960
All right.
00:03:23.360 --> 00:03:29.199
Well, if I'm getting a 10% rate of return, how long does it take for my money to double?
00:03:29.360 --> 00:03:36.560
If I had$100,000, how long at a 10% rate of return does that turn into$200,000?
00:03:37.039 --> 00:03:39.199
Well, the rule of 72 is a quick equation.
00:03:39.360 --> 00:03:48.319
You divide 72 by your rate of return, 10 in this example, and that tells you your money is going to double in 7.2 years.
00:03:48.560 --> 00:03:51.360
Because 72 divided by 10 is 7.2.
00:03:51.439 --> 00:03:57.360
So my$100,000 will become$200,000 in 7.2 years.
00:03:57.520 --> 00:04:03.199
So this is what Albert Einstein said, he who learns this earns it.
00:04:03.439 --> 00:04:07.039
And if you're on the other side of it, if you don't learn it, you actually are the one paying it.
00:04:07.199 --> 00:04:19.519
So if we're thinking of investing, I'm thinking about my IRA and growing my self-directed accounts or any other investment I'm making, I'm really conscious of this number because I'm thinking about long-term growth and compounding.
00:04:19.839 --> 00:04:20.079
Okay.
00:04:20.319 --> 00:04:23.439
Now I love that foundational example.
00:04:23.759 --> 00:04:28.000
And 7.2 years to double your money.
00:04:28.160 --> 00:04:39.680
Well, let's say the ROI goes up to 15%, because you have an alternative investment that you know about, and you can get a better return than what all Wall Street or some other option is offering you.
00:04:39.839 --> 00:04:49.199
If you get a 15% ROI, you take 72 divided by 15, and it tells you that that money will double in 4.8 years.
00:04:49.439 --> 00:04:58.160
Now, in my investment calculator here, when Matt said 100 grand, 10% return, it would double in 7.2 years.
00:04:58.319 --> 00:05:01.680
In 10 years, I would have 259,000.
00:05:01.759 --> 00:05:08.399
See it doubled, went to 200, and then got this little extra 59,000 between 7.2 and 10.
00:05:08.879 --> 00:05:16.480
Well, if I go to 15% rate of return, now that money doubles every 4.8 years.
00:05:16.560 --> 00:05:23.519
And in that same 10-year period, I'm sitting on$404,000 instead of the$259.
00:05:24.160 --> 00:05:31.040
That's the impact of the ROI and lets you know how quickly that snowball is going to get more snow.
00:05:31.360 --> 00:05:41.920
Yeah, and I think when we are looking at our IRA or 401k in particular, or whatever investment account, we're always thinking about long-term perspective, right?
00:05:42.160 --> 00:05:46.959
If you're putting money in your IRA or 401k, you should not be thinking about how do I make money in this next year?
00:05:47.199 --> 00:05:55.279
Well, this compounding effect of the dollars that are earning, like what you make in year one and all that profit rolls in.
00:05:55.439 --> 00:05:56.240
No taxes.
00:05:56.399 --> 00:05:58.879
Okay, there's there's no haircut on your rate of return.
00:05:58.959 --> 00:06:01.279
Okay, and this is why I like IRAs in 401ks.
00:06:01.839 --> 00:06:03.199
Let's let's take a quick example here.
00:06:03.279 --> 00:06:04.639
I don't want to flesh this out.
00:06:04.959 --> 00:06:16.079
Okay, so I'm I private lend my money out of my self-directed IRA, and I charge 12% interest plus two points, and I lend that under six-month terms.
00:06:16.240 --> 00:06:26.639
So when I lend out$100,000, I get two points,$2,000, plus I get 12% interest, all right, which is over an annual year, but I do it under a six-month loan.
00:06:26.879 --> 00:06:31.680
When that money gets paid back, I reloan it out again and I get my two points.
00:06:32.000 --> 00:06:36.399
What I'm saying here is I actually get a 16% rate of return because I get a charge point.
00:06:36.639 --> 00:06:36.879
Okay.
00:06:37.040 --> 00:06:41.600
So I'm getting a 16% rate of return on my money.
00:06:41.920 --> 00:06:43.360
Well, now what's cool about this?
00:06:43.600 --> 00:06:47.439
Well, let me let me say let me say this here before we get to the numbers, I want to make an important tax point.
00:06:47.839 --> 00:06:51.600
If I'm doing that out of my IRA, I made 16%.
00:06:52.560 --> 00:06:57.839
That$16,000 I got in that first year, every penny gets reinvested.
00:06:58.000 --> 00:07:02.879
But let's say I was doing that lending personally with taxable dollars.
00:07:03.120 --> 00:07:06.800
Well, I'm in a 40% tax rate between state and fed.
00:07:06.959 --> 00:07:11.199
When I lend out and I make 16 grand, I lend out 100 grand at 16%.
00:07:11.680 --> 00:07:13.519
I don't get to keep$16,000.
00:07:14.079 --> 00:07:17.839
I've got to send 40% of that to the IRS.
00:07:17.920 --> 00:07:27.519
I'm only keeping 16% of 16,000, or sorry, I'm only keeping 60% of$16,000, which is$9,600.
00:07:27.920 --> 00:07:30.079
I have a 9.6 return.
00:07:30.240 --> 00:07:40.160
So let's show how your money doubles, okay, at a 16% rate of return, 72, excuse me, divided by 16, that's four and a half years.
00:07:41.040 --> 00:07:50.000
So in my IRA, where I'm not paying taxes, and I use a Roth because it comes out tax-free too, my money doubles every four and a half years.
00:07:50.240 --> 00:07:58.560
In my non-retirement account dollars, though, when I invest 100 grand, I'm only getting 9.6 because I got to pay taxes on it.
00:07:58.639 --> 00:08:03.839
I got a silent partner, the IRS, in the state, my money doubles every 7.5 years.
00:08:04.000 --> 00:08:12.160
It takes me almost twice as long for my money to double in a taxable account or with taxable dollars versus my IRA.
00:08:12.399 --> 00:08:12.639
Okay.
00:08:12.800 --> 00:08:18.560
I love it because you're going, you're setting the groundwork for what uh an example I want to give too.
00:08:18.639 --> 00:08:21.120
But I was going to just reiterate what Matt said.
00:08:21.360 --> 00:08:26.240
Um, I did some research, just I'm going to share a little point here.
00:08:26.560 --> 00:08:30.480
Um, my sister is doing some investing.
00:08:30.639 --> 00:08:39.039
And she said, Hey Mark, what can I expect generally on average, if I invest in Wall Street products?
00:08:39.200 --> 00:08:40.000
I don't know what to do.
00:08:40.159 --> 00:08:41.440
What should I invest in?
00:08:41.600 --> 00:08:43.759
How much is my ROI gonna be?
00:08:44.000 --> 00:09:08.159
And I said, Well, let's look at that after fees, and so I said, I think the quote unquote safest, most reliable, and less less uh least costly investment is an S P 500 ETF, exchange traded fund, low fees based on the SP 500.
00:09:08.399 --> 00:09:27.600
As I AI'd that right ways and left ways and went on on the web all over the place, after costs of the investment banking establishment, you're gonna average about 9% with an SP 500, no you know, low-fee ETF.
00:09:27.840 --> 00:09:42.639
Well, Matt, people, let's compare this, is doing 16% with no cost because he's individually lending this out twice a year with a first trust deed as a guarantee that if he doesn't get paid, he's gonna make even more.
00:09:42.799 --> 00:09:44.320
He's gonna take that house back.
00:09:44.559 --> 00:09:47.200
But we'll set that risk issue aside.
00:09:47.360 --> 00:09:50.960
I would consider Matt's strategy much less risky.
00:09:51.279 --> 00:10:00.799
So 9% return over 20 years on that$100,000, you would have$560,000.
00:10:01.039 --> 00:10:07.679
But if I got that 16% return that Matt's doing, it turns into$2 million.
00:10:09.279 --> 00:10:22.080
So that 16%, I just wanted to highlight that, is dramatically, um it makes such a dramatic impact over this 20-year period because Matt said these subtle words.
00:10:22.159 --> 00:10:27.120
He said, the long haul and getting the best ROI can do.
00:10:27.279 --> 00:10:30.559
That's why we like self-directing, because you can choose.
00:10:30.799 --> 00:10:35.360
Um but my subtle point too, Matt, was had to deal with cost, not taxes.
00:10:35.519 --> 00:10:39.759
Matt said, let's not, let's not have taxes and put it in a Roth IRA.
00:10:39.919 --> 00:10:50.320
I'm saying when you self-direct and use alternative asset investing, a lot of times your costs are going to be less than Wall Street as well.
00:10:50.480 --> 00:10:56.320
So you're reducing your costs, you're eliminating tax, and you're driving up your ROI.
00:10:56.480 --> 00:10:58.559
That's like a trifecta.
00:10:58.799 --> 00:11:00.080
We ought to use that word.
00:11:00.320 --> 00:11:00.720
Yeah.
00:11:01.360 --> 00:11:01.600
Yeah.
00:11:01.759 --> 00:11:03.519
Who's got the trademark on that?
00:11:03.759 --> 00:11:12.240
Um yeah, and I think, you know, obviously investing is is, I mean, this is how we grow and build wealth.
00:11:12.399 --> 00:11:21.039
We can all go work our butts off and earn money, whether we're we have a job or a business, and you know, we got to hustle and go get that money, set it aside and invest it.
00:11:21.279 --> 00:11:25.360
But I want you to be thinking about like, how do your dollars work harder for you?
00:11:25.519 --> 00:11:28.720
You know, like I we want to think about like, how's my money working for me?
00:11:28.879 --> 00:11:30.559
Not me working for me.
00:11:30.799 --> 00:11:39.360
So if my money's working for me, I want to do it in the most efficient way, which in our opinion is tax-advantaged accounts because there's no tax drag.
00:11:39.600 --> 00:11:42.639
I want to invest it in the assets that I think can perform the best.
00:11:42.799 --> 00:11:44.399
Maybe that is the stock market.
00:11:44.559 --> 00:11:45.360
I don't know.
00:11:45.600 --> 00:11:52.879
And maybe maybe you have a perspective that the stock market's gonna be better in 26, 27 than it, then, than other assets.
00:11:52.960 --> 00:11:53.919
I I don't know.
00:11:54.000 --> 00:11:55.440
And you know, that nobody knows.
00:11:55.600 --> 00:11:58.000
Precious metals was the best performing asset last year.
00:11:58.080 --> 00:11:58.639
Who knew that?
00:11:58.799 --> 00:12:00.480
A couple years before it was crypto.
00:12:00.720 --> 00:12:01.519
Who knew that?
00:12:01.919 --> 00:12:04.320
Before that, it was private equity.
00:12:04.480 --> 00:12:07.759
Now it's um now the stock market's actually had a good year.
00:12:08.000 --> 00:12:08.960
Is it running out?
00:12:09.200 --> 00:12:13.279
And so and real estate back in 2022 crushed everything else.
00:12:13.600 --> 00:12:23.200
So all these assets have their season and time, but the nice thing about self-directing and what we do every day, what many of our clients at directed IRA are doing is you can invest in whatever you want.
00:12:23.440 --> 00:12:25.679
You want to go in the stock market with your account?
00:12:25.840 --> 00:12:26.240
Great.
00:12:26.480 --> 00:12:29.279
That's the time you feel like the that's the right place you want to be.
00:12:29.440 --> 00:12:37.759
You want to do a real estate deal where you want to own the property, you want to do private lending as we talked, just talked about, invest in a private fund, precious metals, crypto, whatever your perspective of.
00:12:38.000 --> 00:12:39.679
Everyone's trying to figure this out.
00:12:40.000 --> 00:12:50.639
But we want those to have, we want to be able to have the freedom to invest in the asset that has the greatest ROI, not be put in a box before it's only the stock market, which is most broker dealer IRAs.
00:12:50.879 --> 00:13:03.600
We also want to use the tax advantaged account because we don't like the tax drag and the IRS or the state chopping away at our return, which as we've talked about, depletes these dollars over time drastically.
00:13:04.000 --> 00:13:06.000
And what are the fees you're paying?
00:13:06.320 --> 00:13:07.679
The Wall Street fees can add up.
00:13:07.840 --> 00:13:11.919
You've got an advisor, of course, you're there's a cost for that, and they're providing a service too.
00:13:12.080 --> 00:13:17.120
If you're in a lot of these ETFs or these publicly traded funds, there's fees in those things.
00:13:17.279 --> 00:13:23.039
Like when Mark talked about an ETF, are they the low cost fees funds or what are those costs in that?
00:13:23.360 --> 00:13:29.600
And your self-directed IRA, it's very straightforward what the costs are, because it's a flat annual fee that we have, which is$495.
00:13:30.480 --> 00:13:37.759
So I think when you add all that together, I'm just saying, like, this is why I like to self-direct my own retirement account dollars.
00:13:37.919 --> 00:13:44.080
I like to be able to invest in the best investment I can find, not just what's on the publicly traded asset menu.
00:13:44.320 --> 00:13:52.799
And I like knowing those dollars are in accounts that are the most tax efficient in terms of growth and how they're going to come out, which in my opinion is the Roth.
00:13:54.159 --> 00:13:55.039
Wonderful points.
00:13:55.200 --> 00:13:58.240
Um, I just want to add one last perspective.
00:13:59.120 --> 00:14:02.639
And Matt said, I want my money working harder for me.
00:14:03.600 --> 00:14:10.000
Well, I want you, our listener, not working so hard.
00:14:10.240 --> 00:14:15.279
Like I want the money working hard, but I don't want you working so hard.
00:14:15.679 --> 00:14:26.080
And the opposite of that, or the higher and best use of you of this process is for you to work smarter, not harder.
00:14:26.480 --> 00:14:31.039
And working smarter is listening to podcasts like this.
00:14:31.360 --> 00:14:33.039
We want to compliment you.
00:14:33.200 --> 00:14:34.879
We are preaching to the choir.
00:14:35.039 --> 00:14:45.840
You are here because you get it, and you're wanting to have it sink in more, you're wanting to assimilate this, you're wanting to learn anything you can that gives you an edge.
00:14:46.080 --> 00:15:11.440
Well, the edge today is saying, okay, if I can keep costs or fees down, if I can double my money faster, if I can do it in a tax-free vehicle, and I can do it with the latitude of investing what I know best and maybe even creating a less risky investment, people, now you're working smarter.
00:15:11.519 --> 00:15:15.360
And it doesn't take that much more time or effort.
00:15:15.600 --> 00:15:18.159
It just means paying attention.
00:15:18.240 --> 00:15:24.960
And so I want to say thank you for being here because this is going to make the difference to your long-term wealth.
00:15:25.279 --> 00:15:29.759
Yeah, and uh thank you everybody for um getting through to this.
00:15:29.840 --> 00:15:32.320
If you're still listening right now, I think you learned something and liked it.
00:15:32.480 --> 00:15:36.000
I don't know, or maybe you're just like hate watching, whatever, whatever it is.
00:15:36.159 --> 00:15:39.279
Just subscribe, give us some thumbs up, share us with your friends and family.
00:15:39.440 --> 00:15:41.519
Let us know if we can be a resource at directed IRA.
00:15:41.600 --> 00:15:44.320
You can book a free call with our team at directeddira.com.
00:15:44.399 --> 00:15:51.840
We'd love to help you walk through how you can use self directed accounts and use those to grow and build your financial future.
00:15:52.080 --> 00:15:53.200
We will see you next time.
00:15:53.279 --> 00:15:54.399
Thanks for being here.