INFLATION & INVESTING
THE RULE OF 72
Even if the Theory of Relativity wasn’t enough by the great physician, Albert Einstein, he also is credited for the Rule of 72. This ruling declares a simple mathematical formula that states how long an investment would take to double one’s money.
Yes, DOUBLE your investment. Take, for instance, a child inherited $500 from his grandparents and put into a bank Certificate of Deposit earning 1%. It would take 72 years for his investment to double.
72 years / 1% interest = 72 years
72 years / 3% interest = 24 years
72 years / 6% interest = 12 years
72 years / 9% interest = 8 years
The formulas above provide a clear insight on why seeking a higher interest rate when investing works in your favor, but a higher interest rate when paying off debt is terrible. Although the higher the interest rate, the riskier an investment is going to be. However, I want you to consider this.
Ever thought about how banks make their money? Yes, they loan it out, but lets put things into perspective. You put $1,000 into a bank, and in return, you may earn 0.01% on this amount sitting in your checking account. How thoughtful of the bank, you think. The bank then will either loan this out for the going interest (let's say 4%).
The bank already made a nice gain from you. But what if banks had loaned money to you in the form of plastic? Yes, credit cards. They generously pay you 0.01% while charging you from 12-23% or more. With the rule of 72, the financial institutions are raking in the dough very quickly. Consider this the next time you want to charge something onto your credit card.