I recently heard someone proclaiming they were planning to withdraw a large portion of their retirement to lay it down on the roulette table for one spin. The theory is they have a 50% chance of hitting black on this one spin. If they are lucky, they will double their retirement withdrawal in one spin. Let’s look at this theory.
Yes, they may hit the jackpot. However, let’s put it all into perspective. First, the odds of hitting black are not 50%. The odds are closer to 47% when talking about American Roulette. We have just lost 3% of our probability. Let’s say you are planning to drop $10,000.00 on this one bet. If you hit, you are sitting with $20,000.00. If you lose, you are sitting with $0.00.
Now let’s take the same amount of money and think about how long it will take to double in an investment account making 10% per year. If we use the rule of 72, we notice that it will take 72/10=7.2 years to double our money. The odds of this happening are much better, and you are not taking the risking of losing all.
What is the rule of 72?
The rule of 72 is a simple way to calculate how long it will take to double your money. The way the rule works is take the number 72 and divide it by the return you are receiving on your money. For example, if we are receiving 2% return on our investment, it will take 72/2=36 years to double our money. If we are receiving 10% return on our investment, it will take 72/10=7.2 years to double our money.
What do you think is the better strategy?
If you take a look at the above scenario, you will likely reach the same conclusion that I have and invest your money. Have a great day everyone.