The Rule of 72

When I used to work as a Financial Consultant for Cal Fed (before it was purchased by Citibank), I was always amazed by how few people had heard of the Rule of 72. It goes like this: Divide 72 by the interest rate you are getting on your investments and that is how many years it will take to double. If a bank CD pays you 6% annually then it will take you 12 years to double that money. If you had started out with $20,000 and assuming you received 6% interest for 36 years, at the end you would grown that $20,000 into $80,000. Not bad right? But if you had received 12% interest, that same money would be doubling every 6 years instead of twelve and after 36 years you would have $640,000.00 Thats $560,000.00 more than receiving 6% interest. Welcome to the wonderful world of compound interest. I used these examples on a power point presentation to sell clients mutual funds, stocks, annuities, and anything else where they could get more than whatever banks were paying on Certificate of Deposits. Of course I was required by law to explain to clients that there was no guarantee would receive 12% annually and that it was just a s possible that these "investments" would lose value. But wouldn't it be nice if I could guarantee them 12% or maybe 16%? And that is the flipside of the Rule of 72. Credit Cards companies. If you don't pay down balances your $20,000 debt can turn into $560,000.00 in 36 years.

Credit card companies are one of the greatest rackets of the 21st century. Just think about the fees generated by the credit card industry. The merchant pays processing fees, statement fees, transaction fees, and the consumer pays annual fees, interest, and depending on the card there could be a multitude of hidden fees. In addition to all these fees, there is the rule of 72 working in their favor. If sometimes it feels like it may seem impossible for you to get out of debt, it's not far from the truth. Some credit card companies charge 25% on balances. According to the rule of 72, that debt will double in less than 3 years. It is vital to manage your credit card use and keep balances under control. A general rule of thumb is to keep your balance less than 35% of your limit if you are unable to pay off balances month to month. This will keep your credit score clean and avoid any red flags that might damage your FICO score.