The Rule of 72 and How to Make Your First Million by Age 18

Long ago I learned from Sylvia Porter's Money Book that you could rapidly estimate the length of time it would take to double your investment by using the rule of 72. The rule is

time to double = 72 / interest rate

For example, an investment returning 6% would take about 12 years to double. You can see the exact equation and much more at the Wikipedia page on this topic. This is one of those formulas that one should have memorized because you can quickly evaluate the performance of very long term investments, and using it helps see the enormous value of compounding. Now that you have this simple formula in hand, let's put it to use.

Teenagers! Here's How to Make Your First Million

One reason for mentioning the rule of 72 is that I want you to believe me when I say that it is entirely possible to build up enough cash at an early age that allows you to cease investing further for your retirement, for the rest of your life. For the sake of this demonstration, I am going to assume that you want to retire with a million dollars. The trick is to get started in your mid-teens, earn money from summer jobs, paper routes, or Bitcoin, accumulate $8,000 in savings, then invest it in equities. From there, you do nothing. You can live the rest of your life as you want to, including saving more money, but assuming that future long term stock returns do not differ appreciably from those in the past, this is what you will get:

Large Cap Stocks, 10% ROR
Your	# of
Age	Dbls	Gain	Balance
18	0	1x	$8,000
25	1	2x	$16,000
32	2	4x	$32,000
39	3	8x	$64,000
46	4	16x	$128,000
53	5	32x	$256,000
60	6	64x	$512,000
67	7	128x	$1,024,000

This table assumes that you invest in large capitalization stocks, which could be the Dow Jones Industrials, S&P 500, an index fund of large cap stocks, or similar. It assumes that you reinvest the dividends and pay for the taxes on dividends outside the account. Or you could put the money into an IRA and avoid the tax accounting during the investment period. Otherwise, you do not need to contribute any more money. The table shows the growth of the initial investment, with no more money added.

If you invest in small cap stocks, then it is possible to get to your destination a little faster:

Small Cap Stocks, 12% ROR
Your	# of
Age	Dbls	Gain	Balance
18	0	1x	$8,000
24	1	2x	$16,000
30	2	4x	$32,000
36	3	8x	$64,000
42	4	16x	$128,000
48	5	32x	$256,000
54	6	64x	$512,000
60	7	128x	$1,024,000

To buy this investment, you could use any small cap index fund, which most of the major mutual fund families have, or a small cap growth or value fund, preferably both if you can't find a broad index fund. Funds that track the S&P Smallcap 600, Russell 2000 index, or similar would be useful for this style as well.

There is no need to pick stocks, worry about downturns in the market, time the market, use an advisor, or buy any special help. Buying the index is sufficient.

The assumptions here are driven by the historical studies of stock returns. You can find them represented on page 22 (39th sequential page in the PDF file) of Stocks, Bonds, Bills, and Inflation® (SBBI®): 2020 Summary Edition.

Okay, I did trick you a little. This strategy will make you a million dollars, and you can do it before you are 18, but you do have to allow time and compounding to work their magic. You don't actually get a million dollars at age 18. Nevertheless, is it not a clever trick that by investing early and earnestly, that you can effectively quit worrying about saving for retirement thereafter? It's not that hard. Of course, you have to be willing to not spend money instead of spending it, but I hope that now the opportunity gained by choosing to invest is much easier to see.

If you didn't manage to read this at age 14, and you didn't get your $8,000 invested by age 18, you can still use the tables above to figure out where you stand on your retirement investment "trajectory". A 25-year old can make a plan to save, knowing that over the next five years he or she needs to set aside $32,000, but can then stop. But if you don't want to stop after your first million, I understand perfectly if you want to keep going.