The Rule of 72

“Too many people spend money they haven't earned, to buy things they don't want, to impress people that they don't like.” –Will Rogers

Thanks to compound interest, money can double in value over a reasonably small period. The “Rule of 72” approximates how many years it will take for your money to double, given a fixed rate of return. To determine how long it will take for your money to double, you simply divide 72 by the anticipated rate of return. For example, if you expect to receive 4% on the money, use the following formula: 72/4 equals 18 years to double. If you expect to receive a 7% rate of return, your money will double in 10.3 years (72/7). Although it offers more risk than owning a money market account or buying a CD, the stock market could give you a much better option in terms of potential return. The average stock market return over the last century is about 10% per year. This same principle can be applied to your credit card debt, car loan, student loan or home mortgage. This will show you how many years it will take your money to double for your creditors. Say, for example, you owe $5,000 on your credit card and are paying 15% interest. If you divide 72 by 15, you arrive at 4.8., which is the number of years it will take the credit card company to double their investment. The higher the rate, the more you will owe the lender. With interest rates near historical lows, it may make sense to refinance at a lower rate.