…so how fast can I double my investment and can someone please explain the Rule of 72 in a simple way….for dummies?
…here is the explanation that you are looking for, and you can find some really nifty calculators HERE…
…I think we all know that money grows faster at higher interest rates yes?
…so if we are going to put money in a savings account or a bond, we want to have the highest rate possible (in this rate environment it will probably be around 2% max)…
…now, if we owe money, we want to lowest rate possible, so that we can pay the least amount of interest…
…however, did you know that there is a rule that allows you to calculate how many years it will take for your money to double and a certain interest rate?
…what I mean is, say I have an interest rate of 2% in a Certificate of Deposit…
…there is a rule that I can apply to figure out in how many years that money would double, if I didn’t touch it and let it compound annually (add on the interest it earns every year)…
…that is the Rule of 72…
…how does it work?
…you take the interest rate and divide it into 72…(72 / 2 = 36 years)…
…so if you had $1,000 in a CD at 2%, it would become $2,000 in 36 years!
…now let’s look at your mortgage…
…say you have a mortgage of $450,000 at 4%…
…according to the law of 72, the money you owe would double in (72 / 4 = 18 years) if you didn’t make any payments on your mortgage…
…of course you do make payments…
…however, most people don’t realize that with a standard 30 mortgage, even if you make regular payments, you are still paying almost the same amount of money as your purchase price in interest to the bank!
…I used a calculator and to see what the amount of interest that you would pay on a $450,000 mortgage in 30 years would be -$323,412.78!!!!!!!!!!!!!!!
…so, what does this mean for you?
…are you going to pay off the highest interest debt first?
…you still have to save money, thought it’s good to find the highest interest rate possible…
…tell me what the Rule of 72 means for you in the comments below!
This is an awesome rule. This is something that needs to be added to the school curriculum. It’s pretty basic and who doesn’t want to learn how to double their money.
I agree Tom, why don’t they teach us this in school?
This is an important rule to remember as an investor. If you however also invest some money in yourself, your growth can be exponentially faster..
Thanks for the comment Peter, the Rule of 72 for personal growth? =)
Wow. Very interesting. Thanks for sharing your blogpost. I live in Holland but the same over here….
You’re welcome Sharon!