What is the Rule of 72 and How to Get It to Work for YOU

rule of 72

How to Make the Rule of 72 Work for You

Many people don’t understand what the Rule of 72 is or how it can be used to benefit them. This blog is all about the Rule of 72 and hopefully, it will clear things up for many of our wonderful readers out there.

What is the Rule of 72?

The Rule of 72 can be used as an effective shortcut in finance for faster estimation of the exact number of years it would take to double a principal or borrowed amount of money. It can also be used to determine the interest rate required to double the borrowed amount over a specified number of years.

The rule is simply summarized in this formula:
R x T = 72, where R represents interest rate and T stands for the time the amount will be doubled. To compute for R, the formula can be adjusted to R=72/T. If I am to compute for T, it will be T=72/R.

I have actually used this formula in the past to determine possibilities about my credit card debt. One of my cards had an annual interest rate of 15% and a balance of $5,000. So, I was wondering how long it would take to double that amount. The working formula I used ran this way: T=72/15. It will take 4.8 years for my debt to double to $10,000 if I did not pay it off.

How to take advantage of the rule?

From that computation, I knew that it would only take less than five years for my credit card debt to double, if I didn’t pay it on time every month. In such a short time, my debt would double! It would surely become a great burden to me. If my debt were higher, that would be an even greater headache by the end of that timeframe.

We can use this rule to make financial decisions, especially when borrowing money or borrowing credit. Obviously, it should not be our intention to double the debt as it would be detrimental to our financial finance. As much as possible, stick to credit or loans with lower annual interest rates to avoid this.

Investing that money

Instead of paying another $5,000 to my credit card company on top of my current $5,000 debt within 4.8 years, I determined it would be better to NOT pay that interest by paying the debt off early AND invest it where it could exponentially grow. This way, I could make my own money work for myself and not for the credit card company. There are many investments or business ideas I coud make that would also possibly double the amount in less time.

One good investment venue is the stock market. I could use the amount to buy stocks. If the market and the economy get better, it is possible to grow my investment by about 1% to 3% on a daily basis. What’s good about stock market investing is that I can withdraw the amount anytime and if things go according to plan, my money will be working for me —instead of being used to pay interest charges on my credit card.

I realized I could also use the amount to establish my own home-based or small business if I chose. The profit I can make can be so significant that it is possible to double my investment in no time. It would also be wise to use it to buy a property, which I can later sell for a profit. (By the way, that’s exactly what I ended up doing.)

Basically, if you pay off your credit card debt, you’ll save tons of money. Make records of how much you’ll be saving by paying off your debt on time or early and use that same amount towards something that will MAKE you money instead of giving it to the credit card companies. Any sound and safe investment would be better than to give that amount to any credit card company.

Lesson learned? Pay off your credit card debt! If you only pay the minimim amount, you’ll be giving money to the credit card companies that you could have used on investments for yourself.

Do you have any other ideas on how to make your money work for yourself? Share them with us.

Next read- The Dangers of Only Paying the Minimum Amount on Your Credit Card……and also…..
Next read- Prepaid Cards vs. Secured Cards (which is right for you?)

Courtesy of CreditCardShoppe.com

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