So if I am truly blessing my readers with a golden touch, I figured why not teach you about how gold works aka money. I am going to give you all a free lesson in compound interest (seriously it's more interesting than it sounds). This is called The Rule of 72. This incredibly prevalent and powerful rule is actually very simple to understand and can change your funds and lack of fun. This is based on compound interest and rules of exponents. The rule states that you take whatever the interest rate is and you divide it by 72. and the quotient will be a fairly accurate amount of years or cycles it takes for your money to double. Now I know reading about math is not the same as learning it. So I will try my best to create a visual example here that is preceded by a story explaining where the numbers come from:
You, Cousin A, Cousin B, and I all have a common uncle who has recently passed away. When he passed away he left each of us a respective $5,000. Now You are a very financially conservative person and decide to put your money in a savings account that earns 1.0% interest (better than the average savings rate right now). This means that your $5k will be $10k in... 72 years (interest rate divided by 72). However, Cousin A has some connections to a bank and figures out a way to get 3% interest on his savings account so he decides to invest it. Person A's money doubles every 24 years (rule of 72), so Cousin A ends up with $20k in 48 years when he's ready to retire. Cousin B says you guys are crazy for putting your retirement money in a savings account and decides to lock his up in a C.D. or money market account which is earning him a 6% interest rate. Cousin B's money will double every 12 years and he will end up with $80k in 48 years when he is ready to retire, better but certainly not capable of supporting a person or family at retirement. I have the knowledge that you did not. I know that over the last 75 years the S+P 500 (stock market) has averaged about 12% interest on money invested, and yes this includes many wars recessions and even the Great Depression. So I decide to invest my $5k into an ETF that covers the whole S+P 500. I will end up with
$880,000... Now that's a Midas Touch.
Because I know this might not make sense reading it I tried to put a visual graph that showed the progression. I highly suggest looking at it then going back and reading it.
This will hopefully make the rule more clear.
The Rule of 72
The rule states that you take 72 over the interest rate (n) and that is how long it takes till your money doubles. This rule is a rule of compound interest and can be used against you or for you. It is against you when you’re paying credit cards and mortgages. It is for you when you are investing, and putting money in C.D.’s.
72/n = time period for money to double
72/1 = 72 yrs 72/3= 24 yrs 72/6= 12 yrs 72/12= 6 yrs
You, 1% ROI[1] Cuz A, 3% ROI, Cuz B, 6% ROI, Me, 12% ROI
$5k $5k $5k $5k
6 yrs: N/A N/A N/A $10k
12 yrs: N/A N/A $10K $20k
18 yrs: N/A N/A N/A $40K
24 yrs: N/A $10k $20k $80k
30 yrs: N/A N/A N/A $160k
36 yrs: N/A N/A $40k $220k
42 yrs: N/A N/A N/A $440k
48 yrs: N/A $20k $80k $880k
Now that should be retirement for me while you guys are going to have to start looking for other jobs.
To clear up any confusion, this is why banks give you an interest rate. When your money is locked with them they play the market with it and gladly give you a few % ROI, when they can generate that 12% or greater ROI.
If anybody has any questions please let me know.
LJ
