Learn the Rule of 72
One of the easiest ways to impress any financial ‘expert’ is to show that you know what the Rule of 72 is. By knowing this rule you’re also going to be equipping yourself with one of the most powerful financial tools anyone can have. It’s both easy to use and easy to apply to your life and it goes something like this.
Take the number 72 and divide it by the interest rate you’re either getting on your money or that you’re paying in interest to others. The result is the number of years it will take the amount you have invested (or owed) to double. Most people call this Compounding Interest.
When the Rule of 72 works against you …
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.
Think about how fast your debts can double with high interest rates, such as those charged on most credit card accounts.
When the Rule of 72 works for you …
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.
So what’s the takeaway from all of this? Choose wisely when you’re looking at where to invest your money and know what the interest rate you’re paying on your credit cards, mortgage, car note, and other debts is really costing you.