Albert Einstein’s Greatest Discovery Revealed!
Albert Einstein once said “It is the greatest mathematical discovery of all time!”
Most people would think that Albert Einstein is referring to his formula E=mc2, but he is not! He is actually referring to investing with the compound interest rule of 72.
Put simply, the rule of 72 is the time it takes to double your money with interest and it is a very simple equation. To find out how many years it takes to double your money, take 72 and divide it by the interest rate you are receiving. If you are receiving 1% interest from any investment, it will take 72 years to double your money! If you were to get 12% interest, it would only take 6 years (72 divided by 12).
I had a banker once try to get me to open a CD (certificate of deposit) for retirement planning. I asked her what kind of returns I could expect and she proudly brought me to a board where they advertise the banks CD rates. I asked her if I could take a picture of the board to share with others. She told me “Of course, I want as many people to know about this as possible.” So I took a picture.
I explained that I would have to at least double my money in order to retire comfortably. I then shared the rule of 72 and asked her “How many years would it take for me to retire and double my money.” Her eyes opened wide with excitement and she proclaimed “72 years!” I said “Correct, sadly I do not have that kind of time.” I then thanked her for sharing the opportunity to double my money in 72 years and politely declined opening a CD.
What I find most ironic is that the board shared what the bank would pay in interest and the bank shared what they would lend in interest. What this tells me is that the bank makes the rules and that I need to become the bank.
How Do I Become the Bank?
If banks take deposits and re-lend it at a much higher interest rate as mortgages, why can’t I do the same thing? Instead of parking money in a CD, why not lend it out at a much higher interest rate like the bank does? I can give a loan secured by a mortgage just like the bank does. Banks are currently giving mortgages today around 4.25%. That is much better than 1% but even at 4.25% it would still take about 17 years to double my money. That is still too long because I may want to retire sooner than that.
Where Do I Find People Willing to Borrow at Higher Interest Rates?
Construction loans are typically at a higher interest rate than a typical mortgage so I should start there. The only issue with a construction loan is that the builder still has to build the house. They may take the money and not actually build the house. I can foreclose but I might only get raw land which isn’t worth very much.
What about a construction loan on a house that is already built? There are companies that purchase houses at tremendous discounts and rehabilitate them to create value. I can give the company a promissory note secured by a mortgage. This would be a safe investment because I would require them to have insurance if anything were to happen to the house and foreclose on the property if they did not pay the interest. I would also make sure that they purchased the property at a discount so that if I did have to take the house back, I would still have equity. Lastly, I would make sure that they are a reputable company with a track record of doing successful renovations in the past.
If I want a long term loan then I can find investors that have rental properties and are looking to pull some equity out of them. I can give them a promissory note secured by a mortgage. I would want to make sure that there is sufficient cash flow to cover my mortgage, taxes, and insurance. The nice thing about it is that I wouldn’t have to worry about getting a call at 3 am about a leaky toilet because that is the landlord’s problem.
Where Do I Find the Money?
My retirement account is a great place to start. If I rollover the money from my company 401K into a self-directed IRA, I can invest in promissory notes secured by mortgages.
I can also pull some of the equity out of my home with a HELOC and re-lend it at much higher interest rate just like the bank does with deposits.
I can also use money that is sitting in a checking account, savings account, or a CD. After all, that money isn’t even keeping up with inflation.
When Should I Invest?
Now! If I was young, I would take advantage of my age and double my money several times. If I was middle aged, I would supercharge my IRA returns and possibly make up for lost time or make up for the huge losses in my retirement account from the stock market crash in 2007-2008. If I was retired, I would improve my retirement lifestyle and maintain my nest egg.
“Do not wait; the time will never be “just right.” Start where you stand, and work with whatever tools you may have at your command, and better tools will be found as you go along.”
– Napoleon Hill, Author of Think and Grow Rich
In Conclusion
The Rule of 72 is now at your disposal. Realize that the difference between 1% and 2% interest is 36 years! Getting a low interest rate on your investments is not acceptable if you want to retire comfortably.
“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”
-Albert Einstein
Privacy Policy: We hate SPAM and promise to keep your email safe.