March 26, 2012
Do some financial strategies and terms just seem like a complete mystery to you? Do you feel that if someone just explained it in layman’s terms you would be able to understand the foreign language of finances better? Well, good news, I am going to crack one of the financial mysteries to help you when it comes to investing for your future financial goals. This is the rule of 72.*
Ever hear of it? Well, the Rule of 72 is a great financial rule of thumb that basically helps us calculate how many years it will take to double our money, given a specific interest rate. This becomes important as you save for your financial goals because you want your money to be working hard for you. The more time you have and the higher the interest rate, the higher the end result will be.
For example, if you have $10,000 and want to know how long it will take to double your money at a 2% compound interest, divide 2 into 72 and you get 36 years. If you take the same $10,000 and instead use an 8% compound interest, it will take 9 years to double your money– 72/8=9. Get the picture?
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So if you are 30 years old and your financial goal is to accumulate $1 million dollars for retirement by age 60, it does not mean you have to save $1 million. It means your money has to GROW to 1 million– big difference. The more time you have to grow your money, the less money you need, because compounding interest will be hard at work for you. Even if you only have $50 to save per month, by starting now, you will have more time to allow compounding interest to work in your favor.
Here is a chart demonstrating how the Rule of 72 works with different compounding interest rates:
So there you have it, mystery solved. And we didn’t even need to bring in the FBI!
*The rule of 72 is a mathematical concept and does not guarantee investment results nor functions as a predictor of how an investment will perform. It is an approximation of the impact of a targeted rate of return. Investments are subject to fluctuating returns and there is no assurance that any investment will double in value.
Brittney Castro is not affiliated with MadeWomenMag.com. Brittney A. Castro is a registered representative with and securities offered through LPL Financial, Member FINRA/SIPC. California Insurance License #0F33895.