Sunday, May 13, 2012

Practical Applications for Utilizing the Rule of 72

Over the years I have written some posts demonstrating how, by using the Rule of 72, you can calculate approximately how long it will take you to double your money: Where should I invest - bank or stock market?
It is important, now more than ever, to take action and take advantage of this new found knowledge. A lot of people have lost faith in the stock market and instead are putting their money in safer investments like CDs. However, did you know that the average guaranteed interest rate for a Certificate of Deposit (CD) down at the bank right now is less than 1% at around .64%? Yes, that’s right, less than 1%! Also, did you know that when you invest in that safe CD down at the bank they are going to take the money you invest and loan out that money to other people, for instance, people with credit cards? Right now the average interest rate for bank credit cards is around 13%.

If we were to use the Rule of 72 on a CD with a .64% rate of interest, we’d find that we would need approximately a little over 112 years to double our money (72 ÷ .64 = 112.5). If the bank were to get 13% on the money you deposited into the CD then they would be doubling their money approximately every 5 years (72 ÷ 13 = 5.5)!

Remember, there are no guarantees when investing directly in the stock market, but chances are good that you will at least be able to do much better than .64% over time. Still think the CD down at the bank is the safer option?

Don't forget about inflation
The Rule of 72 can also estimate how long it will take for the buying power of a dollar to be cut in half due to inflation. For instance, over the past thirty years, inflation has been right around 3%. Using the Rule of 72 every 24 years (72 ÷ 3 = 24) the buying power of the dollar is worth only fifty cents. Furthermore, if inflation goes up to 4% then the buying power of the dollar will be cut in half every 18 years (72 ÷ 4 = 18).

Knowledge of this can really help you when you are planning for your retirement because you will need to take into account inflation. For example, if you were to set a goal of needing $2000 a month in retirement and you are planning on retiring in 24 years, if inflation is at 3% then in 24 years you would need to make plans for needing $4000 a month – not $2000 a month. This is because in 24 years with 3% inflation $4000 will have the same buying power as $2000 has today. Don't you think this information would be important to know before retirement?

The Rule of 72 is not only important, but if you really understand it, not only can you help yourself and others, but it can also make you look like a genius at parties.

I'm so excited to share this information with you. If you have enjoyed the information or feel that it would benefit someone else, please share it. If you have any comments, please post them below, otherwise, feel free to contact me.
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