Can You Actually Turn $7,000 Into $30,000 in One Year - Or Am I Just Delusional?
How is it a person can make it all the way through college, own a business, healthy middle-aged, make pretty good money but has a huge misunderstanding of the little green papers that drive the world? I'll tell you how. It's because we aren't taught some very basic fundamental ideas about money, what it does, how it works and where it comes from.
This newly small business owner contacted me recently about opening an individual and a Roth IRA account. I thought it was a great move because many small business owners forget that they have to design and create their own retirement-pensions because they work for themselves.
Our business owner mentioned that he was interested in purchasing stocks so that his contributions could possibly grow over time and have a sufficient amount of funds once he decides to retire. That's great! So far so good!
Are you Delusional?
However, here's when our conversation became quite delusional. He said that he was looking to invest about $7,000 and hopefully it could grow to $30,000. I said, in what time frame are you expecting such a return? He said he was hoping it'll grow to $30,000 in 6 months to a year. I had to increase my oxygen capacity after he said that. I almost fell out! I asked him again was he serious and thought it is actually possible to gain $30,000 from a $7,000 investment within 12 months? He said, yes! I knew I was in deep trouble.
What kind of an investment can gain 328% return in a year or less? I shared with him that you can go play the lottery or head on down to the casino and luck may be on your side but it is nearly impossible to expect such a high gain in that time period investing in the stock market (except possibly Bitcoin one year ago).
How's a 10% Annual Return
When it comes to the stock market, the average return in any 10-year period is approximately 10 percent. A 10% return is not bad. It beats inflation - which hovers around 3% annually or money sitting in a bank that'll give you close to a 0.01% return.
To bring the small business owner back to reality, we had be bring logic back into the conversation. I asked him how would he feel if he generated a 10% return on his money every year? He said that would be nice. I thought so too!
What Is The Rule of 72?
I pulled out my calculator and said, using the "the rule of 72" (an equation that projects how long it will take to double your money = 72/10%), an initial investment of $7,000 at a yearly return of 10% will double ($14,000) in 7.2 years. Inevitably, it will take another 7.2 years for the $14,000 to double to $28,000 at our rate of return of 10 percent. So, looking at these numbers, it would take over 14 years to reach $28,000 from our initial investment of $7,000. We're still short $2,000 to reach his goal of $30,000. Didn't he say he wanted to achieve this in 12 months?
The point is this when it comes to investing, it is okay to be optimistic but not delusional. No matter what you invest in, time is a major part of the process. If you buy quality stocks, real estate, or invest in any other sort of business, the reward is the time you allotted for it to reach your ultimate point.
To learn more about the rule of 72 and investing in the stock market, consider taking our 6-week "Sick & Tired of Being Broke" class coming this Fall (2021).