The Rule of 72: Is Your Money Working For You Or Against You?

The Rule of 72 is about the magic of compound interest. Albert Einstein supposedly once said that compound interest is "the greatest mathematical discovery of all time." I don't know if the legendary genius actually made such a statement. But if he didn't, he should have.

The Rule of 72 is a rule of thumb that can help you compute when your money will double at a given interest rate. Just divide the annual rate of return you expect to receive and divide it into the number 72 and it will tell you how long it will take to double your money.

For example, if you can get 10% a year on your investments, your money will double every 7.2 years (72 divided by 10). If you can get 20%, your money will double every 3.2 years. If you can only get 5%, it will take you 14.4 years to double your money.

Of course, that's with money working for you rather than against you. If you choose to have your money working against you rather than for you, the Rule of 72 will work in reverse. If you borrow $10,000 at 10%, and you don't make any payments on your debt, in 7.2 years you will owe $20,000.

Credit card debt is the ultimate in having your money working against you. According to The Motley Fool's Credit Center (http://www.fool.com/ccc/secrets/secrets.htm) here's the reality of credit card debt...

  • Total consumer credit: $1.7 trillion.
  • Total finance charges paid in 2001: $50 billion
  • Market capitalization of AT&T -- the entire corporation: $1.6 billion
  • Percent of U.S. households deemed "credit worthy" by the lending industry: 78%
  • Credit card debt carried by the average American: $8,562
  • Number of credit card holders declaring bankruptcy last year: 1.3 million

    • If you have a credit card debt of $8,000 and you assume a 2.5% minimum monthly payment and a 18% interest rate, it will take 360 months (30 years) to pay your debt and you will pay the $8,000 plus $11,615.32 interest along the way.

    You can have it either way. You can have the Rule of 72 and compound interest working for you or against you. The rich choose to have their money working for them. That's why they're rich. Too many other people choose the opposite course.

    Larry Holmes - EzineArticles Expert Author

    Larry Holmes invites you to visit http://www.Money-Management-Wisdom.com/. You will learn how to become debt-free, save and invest money, cut taxes, manage risk, and achieve financial freedom in a much shorter time than you dreamed possible.