“The safest way to double your money is to fold it over once and put it in your pocket.” – Kin Hubbard
Most of us are familiar with the concept of compounding interest and the rule of 72, which tells us that money doubles at the rate of interest divided into 72.
If you know the rate of interest, you know how long it will take for an amount of money to double.
Let’s say that you get a graduation gift of $1,000 at the age of 17 and you are earning 3% on it.
$1,000: 3% x_________ = 72. How many times does 3 go into 72? 24 times. So, $1,000 will turn into $2,000 in 24 years at 3%.
As the chart shows, at 6%, your $1,000 will double in 12 years, at 12%, it will double in 6 years, and at a ridiculous 18%, you will have $2,000 in a mere 4 years.
You may be saying to yourself, “That’s all well and good in theory, but who’s going to give me 6%, 12% or 18% on my money?” The answer: no one. But here’s where the rule of 72 gets scary. While we will never passively earn 6%, 12% or 18%, we are more than willing to pay it:
If you owe $1,000 at 18% interest, in four years you’ll owe $2,000. Of course you’ll be making payments on it, but many people will get their credit card debt up to $3,000, pay off $2,000, and then get it up to $3,000 again. That original $1,000 is never paid off, and becomes $2,000. And the credit card company will never send you a thank you card.
The lesson is an old and oft-repeated one; avoid debt at all costs. If you can’t earn those percentages, why would you want to help the mortgage and credit card companies earn them? When you do borrow, use this formula, listed in order of importance:
1. The least amount possible
2. For the shortest time possible
3. At the least percentage rate possible
Incidentally, to calculate the time it takes to triple or quadruple your money (or debt), substitute 114 and 144 for 72, respectively. For example:
$1,000: 3% x_________ = 114 (or 114 ÷ 3) will tell you how long it will take for money to triple at 3%.
$1,000: 3% x_________ = 144 (or 144 ÷ 3) will tell you how long it will take for money to quadruple at 3%.