What Does the Rule of 72 Reveal About Your Business?Chia-Li Chien, Ph.D., CFP®, PMP®, CPBC
Chia-Li Chien | May 21, 2015
Treating your business as an investment can pay off in the long run!
To start, let’s all get on the same page about what the Rule of 72 is. For our purposes, the definition of the Rule Of 72 is: A rule stating that in order to find the number of years required to double your money at a given interest rate, you divide the compound return into 72. The result is the approximate number of years that it will take for your investment to double.
For example, if you want to know how long it will take to double your money at 12% interest, divide 12 into 72 and you get six years. (Via Investopedia.)
What would have been your ROI (Return of Investment) if you had invested in Apple stock on July 1, 2004? Well, according to Morningstar, if you bought Apple stock on that date, you paid $2.31 a share. On July 11, 2014, the same Apple stock was trading at $95.22 per share. A quick calculation reveals your ROI would have been 40 times greater than your initial purchase.
So that means if you started your business on July 1, 2004 and used your own hard earned $100,000 as start-up capital, once again, using the Rule of 72, with the average ROI of seven percent, your initial capital investment would have doubled and had a worth of $200,000 by July 1, 2014.
How would you feel about cashing out to realize double your initial investment of $100,000 after ten years? Or do you think your business (and hard work) is worth far more than that? And when would you realize your ROI—which is much more than dollar figures—it is also your time, your sweat and your tears.
Realistically, you should be approaching your business as an investment—even as an investable asset. You just happen to be the one in charge, driving the ROI year after year.
How is the Rule of 72 working for you?
Take a moment to think about your answer. Is it one of any of these?
• It doesn’t matter to me. I’m not in business for money because I am so passionate about what I do.
• I am not really thinking about cashing out or retiring anytime soon, so I can’t be bothered to look at the Rule of 72 right now.
• I’m putting out fires every day in my business and it’s so competitive out there; I don’t have time to think about the Rule of 72.
• My business is in expansion mode, we need capital… I don’t think the Rule of 72 applies here.
As a result, the idea of cashing out or selling simply hasn’t crossed your mind.
It’s a widely held misconception that you can realize your ROI in your business only by selling to a third party or through an IPO. The fact is, you have more options than you can imagine. There are actually 27 different methods to realize your ROI if you intentionally plan and execute in a timely manner.
Want to know more about those 27 methods and how the Rule of 72 applies to your situation?
You will gain insights into your business and put you closer to your business goals. We look forward to speaking with you soon! Schedule an appointment today!