The Rule of 72 The most important and simple rule to financial success.

Tools For You For Financial Success Pay Yourself First saving money immediately from the money you receive main purpose is to get a habit of saving formed 70-20-10 Rule spend 70% of your money on daily expenses save 20% for emergency/opportunities invest 10% long-term

Tools For You For Financial Success How long will it take for $5000 to double at 9% interest? 8 years The answers can be easily discovered by knowing the Rule of 72 The time it will take an investment (or debt) to double in value at a given interest rate using compounding interest. Known as the most important and simple rule to financial success. to determine about how many years it will take to double your money: years to double=72/interest rate to determine the interest rate that will double your money in a set number of years: interest rate=72/years to double

What the “Rule of 72” can determine How many years it will take an investment to double at a given interest rate using compounding interest. How long it will take debt to double if no payments are made. The interest rate an investment must earn to double within a specific time period. How many times money (or debt) will double in a specific time period.

Things to Know about the “Rule of 72” Is only an approximation The interest rate must remain constant The equation does not allow for additional payments to be made to the original amount Interest earned is reinvested

Doug’s Certificate of Deposit Doug invested $2,500 into a Certificate of Deposit earning a 6.5% interest rate. How long will it take Doug’s investment to double? Invested $2,500 Interest Rate is 6.5% 72 = 11 years to double investment 6.5%

The average stock market return Another Example The average stock market return since 1926 has been 11% 72 = 6.5 years to double investment 11% Therefore, every 6.5 years an individual’s investment in the stock market has doubled

Jessica’s Credit Card Debt Jessica has a $2,200 balance on her credit card with an 18% interest rate. If Jessica chooses to not make any payments and does not receive late charges, how long will it take for her balance to double? $2,200 balance on credit card 18% interest rate This equation assumes that no additional payments or late fees were charged Generally minimum payments on credit cards are 2% of the account balance each month 72 = 4 years to double debt 18%

Rhonda’s Treasury Note Rhonda is 22 years old and would like to invest $2,500 into a U.S. Treasury Note earning 7.5% interest. How many times will Rhonda’s investment double before she withdraws it at age 70? Age Investment 22 $2,500 31.6 $5,000 41.2 $10,000 50.8 $20,000 60.4 $40,000 70 $80,000 72 = 9.6 years 7.5% to double investment

Another Example $500 invested at age 18 7% interest How many times will investment double before age 65? Age Investment 18 $500 28.2 $1,000 38.4 $2,000 48.6 $4,000 58.8 $8,000 69 $16,000 72 = 10.2 years 7% to double investment

Conclusion The Rule of 72 can tell a person: How many years it will take an investment to double at a given interest rate using compounding interest; How long it will take debt to double if no payments are made; The interest rate an investment must earn to double within a specific time period; How many times money (or debt) will double in a specific time period

Conclusion continued Things individuals must remember about the Rule of 72 include: Is only an approximation The interest rate must remain constant The equation does not allow for additional payments to be made to the original amount Interest earned is reinvested

Assignment Rule of 72 worksheet—fefe curriculum