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

How are Albert Einstein and the Rule of 72 related?

Compound Interest Formula Credited for discovering the mathematical equation for compounding interest P = original principal amount r = annual interest rate (in decimal form) n = number of compounding periods per year t = number of years A = amount accumulated (principal plus interest after n compounding periods)

72 = Number of years Interest rate 000 The Rule of 72 was discovered by Albert Einstein and he considered it his greatest discovery even over E=MC2. He considered it the most powerful force on earth. In its simplest form Einstein explained it this way. When you invest money, you earn interest on your capital. In the next year, you earn interest on your capital and the interest you earned the year before. By using Einstein’s Rule of 72 we can now fairly accurately determine how long it will take to double your money (or your debt) at a given interest rate. = Interest rate

The Rule of 72 can help you determine How long it will take for money to double when interest is compounded The interest rate an investment must earn to double in a specific time period How many times money will double in a specified time period The number 72 is easily divisible by 2, 3, 4, 6, 8, 9. That’s what makes this formula nice to use because you can use mental math to estimate the number of years it will take for your investment to double in value. Another similar rule, the Rule of 70, is sometimes used because it is divisible by 5. Both rules give similar approximations.

Things to know about the Rule of 72 It’s only an approximation Assumes the interest rate stays constant Does not allow for additional contributions beyond the original principal Does not account for taxes or fees

Financial Risk Pyramid Speculative Investment Tools Increasing potential for higher returns equals increased risk Futures Commercial Paper Options Collectibles Stocks Real Estate Investment Tools Mutual Funds Index Funds Bonds Money Market Deposit Account Savings Tools Checking Account Savings Account Certificate of Deposit Savings Bonds

Doug’s Certificate of Deposit Doug invested $2,500 into a Certificate of Deposit earning a 4% interest rate. How long will it take for Doug’s investment to double? 72 = # years to double investment Interest rate 72 = 18 years to double investment 4

What can I expect if I invest in the Stock Market? The average stock market return since 1926 has been 11%. If this is true today, how long would it take for my investment to double in value? 72 = 6.5 years to double investment 11 Therefore, historically, every 6.5 years, investments in the stock market have doubled.

Financial Risk Pyramid Speculative Investment Tools Increasing potential for higher returns equals increased risk Futures Commercial Paper Options Collectibles Stocks Real Estate Investment Tools Mutual Funds Index Funds Bonds Money Market Deposit Account Savings Tools Checking Account Savings Account Certificate of Deposit Savings Bonds

A Stock Investment Example An investment of $5,000 made today, with a return of 5% will take how many years to double? 72 = 14.4 years to double investment 5 Value of the investment in 14.4 years = $ 10,000

Can the Rule of 72 be applied to increasing debt? YES It can show how fast a debt can double It can show the impact of interest rates on debt

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 her debt 18

Sylvia’s Debt 3.3 years to double what she owes $2,200 balance on credit card 22% interest rate 72 = 3.3 years to double what she owes 22 A 4% difference in interest rates may seem small, but how did that affect Sylvia compared to Jessica?

Jacob’s Car 18% interest rate needed in order to double his investment Jacob currently has $5,000 that he wants to invest so he can purchase a car after he graduates in 4 years. He would like to have $10,000 for the car purchase. What interest rate will he need in order to double his money? 72 = 18% interest rate needed in order to double his investment 4 yrs

Rhonda’s Treasury Note Rhonda is 22 years old and would like to invest $2,500 into a U.S. Treasury Note earning 3.25% interest. What will Rhonda’s investment be worth when she withdraws it at age 66 1/2? 72 = 22.2 years Age Investment 22 $2,500 44.2 $5,000 66.4 $10,000 3.25 Every 22.2 years, the investment will double in value

Seth’s Investment 14.4 years = 72 5 Seth just turned 18 and recently graduated from high school. He has been saving money from his job and received several cash gifts for graduation. He currently has $2,500 to invest and the bank is offering a 5% interest rate. How much will Seth’s investment be worth when he is 62? How many times did the investment double in value? Age Investment 18 $2,500 32.4 $5,000 46.8 $10,000 61.2 $20,000 72 = 14.4 years 5 Seth’s investment doubled in value 3 times

How do taxes impact your investment choices? Taxed Account – taxes are paid on money before it is invested A person can choose to invest into two types of accounts: Tax Deferred Account – taxes are not paid until the individual withdraws the money from the investment

An account that is tax-deferred until George withdraws the money Taxes Example George is in the 33% tax bracket. He would like to invest $100,000 and is comparing two accounts that both have a 6% interest rate. Choice #1 An account that uses money on which George has already paid approximately 2% in taxes Choice #2 An account that is tax-deferred until George withdraws the money Which account should George choose?

Effects of taxes = 18 years = 12 years Taxed Account 6% - 2% = 4% Earns 4% after taxes Tax-deferred Account Earns 6% before taxes 72 72 = 18 years = 12 years 4 6 After this # of years, the taxed account is worth the tax-deferred account is worth 12 $200,000 18 24 $400,000 36 $800,000 At 6% interest the money will double every 12 years At 4% interest the money will double every 18 years

The Rule of 72 can help you determine How long it will take for money to double when interest is compounded The interest rate an investment must earn to double in a specific time period How many times money will double in a specified time period The number 72 is easily divisible by 2, 3, 4, 6, 8, 9. That’s what makes this formula nice to use because you can use mental math to estimate the number of years it will take for your investment to double in value. Another similar rule, the Rule of 70, is sometimes used because it is divisible by 5. Both rules give similar approximations.

Things to know about the Rule of 72 It’s only an approximation Assumes the interest rate stays constant Does not allow for additional contributions beyond the original principal Does not account for taxes or fees

Any questions?