The concept is designed to tell how fast money will double. Take an interest rate 6%. We will divide that into 72 (that is why it is called the rule of 72).
72 divided by 6 = 12
What does that mean to you and me?
It means if we take a stated number of money (example: $1,000) and we get 6% interest, that $1,000 will double in 12 years
So in 12 years, the $1,000 = $2,000
in 12 more years, it doubles = $4,000
in 12 more years, it doubles = $8,000
Why is this important?
If your bank is paying you 1% interest
72 divided by 1 = 72
Yes, that means it will take 72 years for your $1,000 investment to double to $2,000.
So don’t kid yourself if you have $1,000 sitting in your bank and waiting for it to grow and accelerate you to a comfortable retirement.
Some will say, are you saying I should just blow it?
I would never say blow it. But if that is all you are doing, you might as well enjoy it.
Every year, your $1,000 is worth less (because of inflation)
For those that are asking what is inflation, just think of the products you buy – they are increasing in price every year. So if your money is not keeping up with inflation (which is higher than 1%), the value of your money is decreasing every year.
Today, the TV you are looking at is selling for $1,000
Next year because of inflation (we will use 4% – yea right lol), that TV next year will cost $1,040
Being a smart consumer, You decide to leave your money in the bank, so you could earn interest and you will get the TV next year.
Your money in the bank (getting that 1% interest) grew to $1,010
So you just lost $30 in buying power in one year (TV is now $1,040 and you have $1,010). Think about it. This is happening to you every single year.
I have had people that want to argue with me that higher interest rates don’t exist. The first thing I ask them is, do you have a credit card? What interest rate are you paying? Some don’t know, which is not good. After this example you will know why.
Tip: Your credit score will play a major role in what interest you are paying.
So let’s say you are paying 18%. Trust me, there are people paying up to 30% and more. (We will cover credit cards in another training).
Well your $1,000 you placed in the bank grew in one year to $1,180 (for the bank because they took your $1,000 and loaned it to someone else or gave it as a line of credit for $1,000 to another consumer. In some cases they give you a credit card, charge you 18% and will have to pay you 1% interest on your money in your bank account).
Can you say, very profitable business.
So let’s say at the end of the year, you decide to withdrew your money. They give you $1,010 (after paying you the 1% you earned). So the bank earned $170 off of your money ($1,180 that it grew for them – $1,010 your money plus interest).
Folks that is just $1,000. How many thousands does your bank have?
Staying with the rule of 72
72 divided by 18 = 4
So your $1,000 doubles for your bank every 4 years
in year 4, doubles to $2,000
in 4 more years, doubles to $4,000
in 4 more years, doubles to $8,000
in 4 more years, doubles to $16,000
in 4 more years, doubles to $32,000
So in year 20 the bank has earned $32,000 and they don’t have to double your money and pay you $2,000 until year 72
By the way, this is the reason in some instances, you will never pay off your credit cards if you continue to pay the minimums. I have seen financial plans that showed people that they wouldn’t be out of debt until 2107 paying minimums.