Learn Stock Market Investing

In my previous post, I discussed why I consider the Rule of 72 as the foundation of all investing. I explained that before we can start to tackle stuff about stock market investing, we need to learn first about the Rule of 72. It is because the Rule of 72 teaches about a lot of things that are very basic and foundational in investing.

The Rule of 72 is just a fancy term for the concept of the principle of compounding interest. It also gives you a simplistic mathematical formula that shows you how money grows. Compounding is simply earning interest on your money and investing said interest. The Rule of 72 gives a simple demonstration on how this is achieved.

So what are some things we can learn from the Rule of 72? Here some things, I believe we can learn from this magical Rule.

1.) Money is like a fruit tree – Money is like a fruit tree, you don’t expect to plant something and get to eat its fruit the next day. What I am saying is that it will take time for money to grow. The Rule of 72 teaches you that the more time you “compound” your money the greater will be its return. You will learn more about this in the illustration that I will give in my next post.

2.) Its the interest rate stupid – The Rule of 72 teaches us that the higher the interest rate, the lesser time your money will double and the lesser time your money will double, the more your money will grow especially if you lock it in for a long period of time using your desired vehicle of investment.

3.) Money does not grow on trees – This saying simply means that it takes “effort” in order for money to grow. There is no such thing as free or dumb money. The Rule of 72 teaches us that in order to get more out of our money we must make an effort to get the highest interest rate and the at the same time making sure that we do not loose money in the process by engaging in “uncalculated risky investments” or “too good to be true” investment deals.

4.) Make money work hard for you – Some people say that we should not work hard for money but that we should let money work hard for us. I definitely agree. There is no better way to financial freedom than to let money work hard for us. Unlike us, money doesn’t get sick, money doesn’t get tired and money doesn’t complain. Since the Rule of 72 is all about the concept of compounding interest, it demonstrates for us how interest when re-invested again begets interest.

5.) The concept of the “Automatic money machine” – The Rule of 72 helps you understand a powerful concept in personal finance, the concept of Passive income. Personal finance gurus tell us that there are two types of income, active income and passive income. In active income, you have to do something to get income; an obvious example of this is your day job. You have to be physically present and doing something in your day job in order to earn an income. Passive income on the other hand is an “automatic money machine” In passive income; you don’t have to do anything to earn an income. You just sit down and wait for income to come. Passive income does not come automatically, you have to do something first afterwards you will reap the benefit and just wait for income to come. An obvious example of passive income is interest income wherein your money earns money without you doing anything to earn said interest. The Rule of 72 gives you clear demonstration of what passive income is all about.

So there you have it! See what important and powerful lessons in investing, business and personal finance the Rule of 72 has taught us? This is the reason why I have called it as the foundation for all investing.

Hi ! my name is  Zigfred Diaz, Thanks for visiting my blog where you can learn stock market investing the Warren Buffett way and using other value investing methods ! Never miss a post from this blog. Subscribe to my full feeds for free. Click here to subscribe to D’Intelligent Investor by Email