All through my college experience and with all the General Education Requirement classes I took, I NEVER once saw or was told about this Golden Rule in Finance. This is one rule I truly believe we all need to know because it affects our lives tremendously with the decisions that we make.
Funny enough, how ironic it is that I was taught how to dissect PIGS and FROGS pursuing an Engineering degree, like it was that IMPORTANT in my life today. But think about it, how many people do you know are in debt? And how many people do you know are being taught the ways to overcome them? Wow! something to think about isn't it?
Well this is what the RULE OF 72 Says:
It is simply the amount of TIME it takes for a person's MONEY to double! YES that simple. We all know the Simple Interest formula : S.I = Principal X Rate X Time. Well this rule takes it a step further it is the power of Compound Interest. Let me make this very simple for us to understand:
Take, for example, I have $10,000 I am trying to invest. The rule of 72 simply states that:
If I go to a bank and I was EXTREMELY lucky to get 1% rate of return, when you divide 72/1 that equals what simple arithmetic right? Yes your right! It equals 72!! U know what that means, that's right! It will take 72 (yes! seventy-two!) years for my $10,000 to double to $20,000! My goodness say I am 30yrs old now so I would be 102yrs old for that to happen. Hopefully I am still alive.
OK now lets say I got a good investment manager that sold me on a CD (certificate of Deposit) and offered me a good 3% ROR (Rate of return), so doing the Math again that will be 72/3 =24. So that's 24yrs not any better is it?
What if I got 6% (very unlikely from a bank trust me!) so based on our Magic rule what will that result to? Yep! you're right my friend, 72/6= 12yrs and so on.
NOW THIS IS THE QUESTION I WANT TO ASK YOU ALL AFTER I SHOWED AND EDUCATED YOU ABOUT THIS TODAY. DO YOU THINK BANKS AND CREDIT CARD COMPANIES UNDERSTAND THIS MAGIC RULE?
If you said YES you are very correct! If you said No like I did, I don't blame you at all that's is simply what they've made us believe!
Now check this out, supposing you got a ROR of 12% (now you might want to email me to find out where to get that) can you tell me how fast your money will double? 72/12= 6 yrs. So imagine if I invested long term for 30 yrs (average working period of most people). Do you know how much that will come up to be compare to the 6% or 3% or 1% or even less (that you get from other sources)? I will leave you to do the math.
"My people perish for lack of Knowledge" But thank God we are now Knowledgeable = POWER!
Have a Great day!!