Power Yourself Into a Fiscally Fit Future With the Rule of 72

November 3rd, 2011 | By admin No Comments

Albert Einstein himself once called this concept the most powerful concept in the universe. It is one that everyone should consider every time they invest money, get a loan or slide a credit card. It is called “The Rule of 72.”

Divide the number 72 by the interest rate your money is earning, and you will get the number of years it will take your money to double. For example, if you are a 5th grader who has put $100 in the bank from babysitting, lawn mowing or other odd jobs, and you are earning 8% interest, then it will take nine years for your savings to double:

72 ÷ 8 = 9 … so … your
$100 becomes $200 in 9 years

Those of you who are thinking about your retirement account, do the same simple equation. Let’s say you’ve put $20,000 away and it is earning a hypothetical 8% interest, it will take nine years for the amount to double to $40,000. If you’re 27 years away from retirement, then, you will have $160,000 at the time of your retirement.

$20,000 = $40,000 in the first 9 years
$40,000 = $80,000 in 18 years
$80,000 = $160,000 in 27 years

Just like a sport, starting early can mean a huge advantage. Let’s say you invest $1,000 when you are 18 years old at a hypothetical 8% rate. When you are 63 years old that untouched $1,000 has become $64,000. By the way, since money invested earlier has more time to double, you can also see why starting your savings early can make a huge difference.

Now let’s add the fiscal equivalent of ongoing training and commitment. Imagine how much you might have if you continued to add, say, $100 a month for all those years. You would, quite literally, be a millionaire.

Here’s the not-so-good news. Whereas in investing The Rule of 72 works to your advantage, it is the reverse in debt vehicles like credit cards. The principle on your credit card at 12% doubles every six years. A credit card at 18% doubles every four years! Something to think about before you reach for that card too often.

Think of The Rule of 72 in every day life for both saving money and incurring debt. It can make a big positive difference in your financial life (which, incidentally, is our goal at Hughes Federal Credit Union). And keeping fiscally fit and tuned up can also play a very big role in your overall health, attitude and peace of mind!

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