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Transcript
The Rule of 72 The most important and simple rule to financial success. © Family Economics & Financial Education – Revised November 2004 – Saving Unit – Rule of 72 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona 1.14.3.G1 Rule of 72 The answers can be easily discovered by knowing the Rule of 72 The time it will take an investment (or debt) to double in value at a given interest rate using compounding interest. 72 Interest Rate = Years to double investment (or debt) © Family Economics & Financial Education – Revised November 2004 – Saving Unit – Rule of 72 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona What the “Rule of 72” can determine 1.14.3.G1 How many years it will take an investment to double at a given interest rate using compounding interest. How long it will take debt to double if no payments are made. The interest rate an investment must earn to double within a specific time period. How many times money (or debt) will double in a specific time period. © Family Economics & Financial Education – Revised November 2004 – Saving Unit – Rule of 72 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona Things to Know about the “Rule of 72” 1.14.3.G1 The “Rule of 72” Is only an approximation The interest rate must remain constant The equation does not allow for additional payments to be made to the original amount Interest earned is reinvested Tax deductions are not included within the equation © Family Economics & Financial Education – Revised November 2004 – Saving Unit – Rule of 72 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona Doug’s Certificate of Deposit 1.14.3.G1 Doug invested $2,500 into a Certificate of Deposit earning a 6.5% interest rate. How long will it take Doug’s investment to double? Invested $2,500 Interest Rate is 6.5% 72 = 11 years to double investment 6.5% © Family Economics & Financial Education – Revised November 2004 – Saving Unit – Rule of 72 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona 1.14.3.G1 Another Example The average stock market return since 1926 has been 11% 72 = 6.5 years to double investment 11% Therefore, every 6.5 years an individual’s investment in the stock market has doubled © Family Economics & Financial Education – Revised November 2004 – Saving Unit – Rule of 72 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona 1.14.3.G1 Jessica’s Credit Card Debt Jessica has a $2,200 balance on her credit card with an 18% interest rate. If Jessica chooses to not make any payments and does not receive late charges, how long will it take for her balance to double? $2,200 balance on credit card 18% interest rate 72 18% = 4 years to double debt © Family Economics & Financial Education – Revised November 2004 – Saving Unit – Rule of 72 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona 1.14.3.G1 Another Example $6,000 balance on credit card 22% interest rate 72 22% = 3.3 years to double debt © Family Economics & Financial Education – Revised November 2004 – Saving Unit – Rule of 72 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona 1.14.3.G1 Jacob’s Car Jacob currently has $5,000 to invest in a car after graduation in 4 years. What interest rate is required for him to double his investment? $5,000 to invest Wants investment to double in 4 years 72 4 years = 18% interest rate © Family Economics & Financial Education – Revised November 2004 – Saving Unit – Rule of 72 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona 1.14.3.G1 Another Example $3,000 to invest Wants investment to double in 10 years 72 10 years = 7.2% interest rate © Family Economics & Financial Education – Revised November 2004 – Saving Unit – Rule of 72 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona 1.14.3.G1 Rhonda’s Treasury Note Rhonda is 22 years old and would like to invest $2,500 into a U.S. Treasury Note earning 7.5% interest. How many times will Rhonda’s investment double before she withdraws it at age 70? 72 = 9.6 years 7.5% to double investment Age 22 Investment $2,500 31.6 41.2 50.8 $5,000 $10,000 $20,000 60.4 70 $40,000 $80,000 © Family Economics & Financial Education – Revised November 2004 – Saving Unit – Rule of 72 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona 1.14.3.G1 Another Example $500 invested at age 18 7% interest How many times will investment double before age 65? 72 7% = 10.2 years to double investment Age 18 Investment $500 28.2 38.4 48.6 $1,000 $2,000 $4,000 58.8 69 $8,000 $16,000 © Family Economics & Financial Education – Revised November 2004 – Saving Unit – Rule of 72 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona 1.14.3.G1 Conclusion The Rule of 72 can tell a person: How many years it will take an investment to double at a given interest rate using compounding interest; How long it will take debt to double if no payments are made; The interest rate an investment must earn to double within a specific time period; How many times money (or debt) will double in a specific time period. © Family Economics & Financial Education – Revised November 2004 – Saving Unit – Rule of 72 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona 1.14.3.G1 Conclusion continued Things individuals must remember about the Rule of 72 include: Is only an approximation The interest rate must remain constant The equation does not allow for additional payments to be made to the original amount Interest earned is reinvested Tax deductions are not included within the equation © Family Economics & Financial Education – Revised November 2004 – Saving Unit – Rule of 72 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona