Aug 31, 2009

Saving & Investing: Rule of 72

Remember when you were in 3rd grade, and you learned all those times tables? There was a reason for that. It was so that when you grow up, you can understand the rule of 72, which Einstein called the 8th wonder of the world. It's really cool. Ready?

What are the factors of 72? 1, 2, 3, 4, 6, 8, 9, 12, 18, 24, 36, and 72. There are a lot of them.

Use the Rule of 72 to figure out, when investing, how many years it will take you to double your money. If you are earning 2% on your savings account, divide 72 by 2. It will take you 36 years to double your money. If you borrow at a mere 24% annually from your local kneewhacker, or a cash advance on the credit card (Danger Will Robinson!!!) it will only take you 3 years to double the amount you now owe. Ouch.

Divide 72 by the interest rate. Use a calculator; it's ok. (If your money is in the mattress, don't try this trick at home. You can't divide by zero.)

How many years will it take you to double your money where you currently have it? It might be time for rearranging.

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