Do you know how long it will take for your money to double? Figuring this out is easier than you think! No super-computer, NASA rocket scientist, or even a calculator is required! All you need is the Rule of 72.

The Rule of 72 is an equation discovered by Albert Einstein, but so easy a 3rd grader can do it. (Yes, I said a 3rd grader, not 3rd year calculus major!) It’s an easy way to approximate how long it will take your money to double.

How do we do this? Easy! All you need to do is divide 72 by the interest rate. That’s it! The result will let you know approximately how many years it will take for your savings to double.

Let’s walk through a few examples….

Three friends decide to try their hand at investing. Each has $10,000 in their pocket, and want to see their money grow.

**Joe** fancies himself a savvy consumer, so he makes sure to hit RateSupermarket.ca to look for a high interest rate savings account. He bypasses these, as he found the banks are offering as little as 0.05% to as “much” as 2% on their “high” interest rate accounts. (These are actual rates pulled from RateSupermarket.ca on May 20, 2011) Joe thinks he’s found a smoking hot deal when he’s offered a 4% rate of return. How long will it take his $10,000 to turn into $20,000? Let’s do the math:

72/4 = **18 years**!

**Brian** thinks that Joe is a sucker for choosing to invest at 3%. Brian instead choses an investment with a 6% rate of return. How long will it take his $10,000 to double?

72/6 = **12 years**… a little better…

**Ally** doesn’t want to wait 12 years for her $10,000 to double. Understanding the Rule of 72, and having a higher risk tolerance than her two friends, she choses an investment that has historically provided a 12% rate of return*. Assuming that her higher-risk choice does end up providing a steady 12% rate of return, when will her $10,000 turn into $20,000?

72/12 = **only 6 years**!

Now you know how simple the Rule of 72 is! How long will it take for your money to double?

* *Past performance does not guarantee future results*

You may have heard the phrases “Make your money work for you” and “Work smarter, not harder”. If you’re like the average hard-working Canadian, you probably work FOR your money, not the other way around, and bust your butt doing it. So how do we begin changing this around? We need to get you educated on how money works!

You’ll need to know a few simple concepts that anyone can master. You don’t need to be an Einstein, but you do need to know the power of compound interest, first and foremost. This is absolutely key to understanding when to start saving, how to start saving, and what your results could look like. It will also show you just how dangerous and damaging credit card debt can be – and how to minimize the overall amount your credit card debt will cost you.

The Rule of 72 is an equation discovered by Albert Einstein, but so easy a 3rd grader can do it. The Rule of 72 will show you just how powerful compound interest can be. It’s an easy way to calculate how long it will take your money to double. You’ll see how important it is to “pay yourself first”… and the high cost of waiting to do so.

On the flip-side of saving is spending. It is imperative to understand how much it costs you when you carry a balance on your credit cards. Do you know how much that new gadget you just HAD to have, and had to put on your credit card, is going to cost you by the time it is paid off? The Rule of 72 provides a terrifying illustration of how compound interest increases your credit card debt at an astronomical rate that the banks love!

While we’re talking about debt, let’s also introduce the concept of debt stacking. Taking into account the interest rate and amount of debt, debt stacking determines the ideal order for you to eliminate your debts – and it’s not always what you think! The beauty of debt stacking is that you eliminate your debts faster, without increasing your total monthly payments, while saving you tons of money in interest in the long run.

KnowMoney.ca will delve further into these important personal finance topics in upcoming posts. Keep reading to learn the details on building your solid financial future!

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