Thursday, October 01, 2009

The Rule of 72

Step 1 of 2: How long does it take my money to double?
This step teaches you how to determine the number of years it will take for your investment or debt to double in value.
Divide the number 72 by the percentage rate you are paying on your debt, or earning on your investment. Here are two examples...
You borrowed $1,000 from your friend, who is charging you 6% interest. 72 divided by 6 is 12. That makes 12 the number of years it would take for your debt to your friend to double to $2,000 if you did not make any payments.
You have a savings account with $500 deposited in it. It earns 4% interest from the bank. 72 divided by 4 is 18. It will take 18 years for your $500 to double to $1,000 if you don't make any deposits.
Remember: 72 divided by the Interest Percentage is the number of years it takes to double.
Step 2 of 2: How many times will my money double?
This step teaches you how important it is for your money to double as many times as possible, and for your debts to double as few times as possible.
Determine how many years you will keep your investment before cashing it in. Divide that by the number of years it will take to double each time, the number you figured out in step one.
Now look at what happens to your money each time it doubles...
$1 ... $2 ... $4 ... $8 ... $16 ... $32 ... $64 ... $128 ...
You can see that it makes a big difference how many times your money doubles. If you can make it double only a few more times by making just slightly better investments, you can end up with many times more money at retirement, or whenever you cash in your investment.
Think about how fast your debts can double with high interest rates, such as those charged on most credit card accounts.

Credit Cards and The Rule Of 72
The interest rates you pay on your credit cards are more financially devastating than you may think. Be absolutely certain that you have the best interest rate available to you if you carry any credit card balances.
Use the Rule Of 72 to calculate how much more an 18 percent interest rate costs than a 12 percent interest rate. If you didn't make any payments and your credit card issuer didn't charge you any extra late or over limit fees, your debt would grow to 8 times its original size at 18 percent interest, or 4 times its original size at 12 percent, in only 12 years.
Of course you will make payments, though. After all, every time you don't make a payment on time, you credit card issuer will be more than glad to charge you as much as $30 or more extra.
It is common for minimum payments on credit cards to be about 2% of the account balance each month. If you pay the minimum payment every month, and never make any new charges, it will take you about 30 years to pay off your account at 18 percent, or about 20 years at 12 percent. And at 12 percent you not only make about 120 fewer payments than at 18 percent, but your payments also get a lot smaller, a lot faster. You will pay back about twice as much money at 18 percent interest as you will pay back at 12 percent.
You may not even want to know how much more dismal the numbers are if your interest rate is over 20 percent, or even over 30 percent, as some credit card issuers are charging!

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