Page 1
2.4.5.G1
© Take Charge Today –June 2016 – Rule of 72– Slide 1Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
*The Rule of 72
The most important and simple rule
to financial success.
Page 2
2.4.5.G1
© Take Charge Today – June 2016– Rule of 72– Slide 2Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
How are Albert Einstein and the Rule of 72 related?
Page 3
2.4.5.G1
© Take Charge Today – June 2016 – Rule of 72– Slide 3Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Credited for discovering the mathematical equation for
compounding interest
Page 4
2.4.5.G1
© Take Charge Today – June 2016 – Rule of 72– Slide 4Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
000
Page 5
© Take Charge Today – June 2016– Rule of 72– Slide 5Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
2.4.5.G1
The Rule of 72can help you determine
How long it will take for money to double
when interest is compounded
The interest rate an investment must
earn to double in a specific time period
How many times money will double in
a specified time period
Page 6
© Take Charge Today – June 2016– Rule of 72– Slide 6Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
2.4.5.G1
Things to know about the Rule of 72
It’s only an approximation
Assumes the interest rate stays constant
Does not allow for additional
contributions beyond the original principal
Does not account for taxes or fees
Page 7
2.4.5.G1
© Take Charge Today – June 2016– Rule of 72– Slide 7Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Financial Risk Pyramid
Futures
Options Collectibles
Speculative Investment
Tools
Stocks Real Estate
Mutual Funds
Index Funds
Bonds
Investment Tools
Checking Account
Savings Account
Money Market Deposit Account
Certificate of Deposit
Savings Bonds
Savings Tools
Commercial Paper
Increasing potential for
higher returns equals
increased risk
Page 8
© Take Charge Today – June 2016– Rule of 72– Slide 8Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
2.4.5.G1
Doug’s Certificate of Deposit
= 18 years to double investment
Doug invested $2,500 into a Certificate of Deposit earning a 4% interest rate.
How long will it take for Doug’s investment to double?
72
4
= # years to double investment72
Interest rate
Page 9
© Take Charge Today – June 2016– Rule of 72– Slide 9Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
2.4.5.G1
What can I expect if I invest in the Stock Market?
= 6.5 years to double investment
The average stock market return since 1926 has been 11%. If this is true today, how long would it take for my investment to
double in value?
72
11
Therefore, historically, every 6.5 years, investments in the stock market have doubled.
Page 10
2.4.5.G1
© Take Charge Today – June 2016– Rule of 72– Slide 10Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Financial Risk Pyramid
Futures
Options Collectibles
Speculative Investment
Tools
Stocks Real Estate
Mutual Funds
Index Funds
Bonds
Investment Tools
Checking Account
Savings Account
Money Market Deposit Account
Certificate of Deposit
Savings Bonds
Savings Tools
Commercial Paper
Increasing potential for
higher returns equals
increased risk
Page 11
© Take Charge Today – June 2016– Rule of 72– Slide 11Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
2.4.5.G1
A Stock Investment Example
An investment of $5,000 made today, with a return of 5% will take how many years to double?
Value of the investment in 14.4 years = $ 10,000
= 14.4 years to double investment72
5
Page 12
© Take Charge Today – June 2016– Rule of 72– Slide 12Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
2.4.5.G1
Can the Rule of 72 be applied toincreasing debt?
*It can show how fast a debt can double*It can show the impact of interest rates on debt
YES
Page 13
© Take Charge Today – June 2016– Rule of 72– Slide 13Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
2.4.5.G1
Jessica’s Credit Card Debt* Jessica has a $2,200 balance on her credit card
with an 18% interest rate.
* If Jessica chooses to not make any payments and does not receive late charges, how long will it take for her balance to double?
$2,200 balance on credit card18% interest rate
= 4 years to double her debt72
18
Page 14
© Take Charge Today – June 2016– Rule of 72– Slide 14Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
2.4.5.G1
Sylvia’s Debt
* $2,200 balance on credit card
* 22% interest rate
= 3.3 years to double what she owes72
22
A 4% difference in interest rates may seem small, but how did that affect Sylvia compared to Jessica?
Page 15
© Take Charge Today – June 2016– Rule of 72– Slide 15Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
2.4.5.G1
Jacob’s Car
Jacob currently has $5,000 that he wants to invest so he can purchase a car after he graduates in 4 years. He would like to have $10,000 for the car
purchase. What interest rate will he need in order to double his money?
= 18% interest rate needed in
order to double his investment
72
4 yrs
Page 16
© Take Charge Today – June 2016– Rule of 72– Slide 16Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
2.4.5.G1
Rhonda’s Treasury Note
Age Investment
22 $2,500
44.2 $5,000
66.4 $10,000
Rhonda is 22 years old and would like to invest $2,500 into a U.S. Treasury Note earning 3.25% interest. What will Rhonda’s investment
be worth when she withdraws it at age 66 1/2?
= 22.2 years72
3.25
Every 22.2 years, the investment will double in value
Page 17
© Take Charge Today – June 2016– Rule of 72– Slide 17Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
2.4.5.G1
Seth’s Investment
Seth just turned 18 and recently graduated from high school. He has been saving money from his job and received several cash gifts for graduation. He currently has $2,500 to invest and the bank is offering a 5% interest rate. How much will Seth’s investment be worth when he is 62? How many times did the investment double in value?
Age Investment
18 $2,500
32.4 $5,000
46.8 $10,000
61.2 $20,000
= 14.4 years72
5
Seth’s investment doubled in value 3 times
Page 18
2.4.5.G1
© Take Charge Today – June 2016– Rule of 72– Slide 18Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Taxed Account – taxes are paid on money before it is invested
A person can choose to invest into two types of
accounts:
Tax Deferred Account –taxes are not paid until
the individual withdraws the money from the
investment
How do taxes impact your investment choices?
Page 19
2.4.5.G1
© Take Charge Today – June 2016– Rule of 72– Slide 19Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Taxes Example
George is in the 33% tax bracket. He would like to invest $100,000 and is comparing two accounts that both have a 6% interest rate.
Choice #1
An account that uses money on which George
has already paid approximately 2% in
taxes
Choice #2
An account that is tax-deferred until George withdraws the money
Which account should George choose?
Page 20
© Take Charge Today – June 2016– Rule of 72– Slide 20Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
2.4.5.G1
Effects of taxes
After this # of years,
the taxed account is
worth
the tax-deferred account is
worth
12 $200,000
18 $200,000
24 $400,000
36 $400,000 $800,000
Taxed Account
6% - 2% = 4%
Earns 4% after taxes
Tax-deferred Account
Earns 6% before taxes
= 18 years72
4= 12 years
72
6
Page 21
© Take Charge Today – June 2016– Rule of 72– Slide 21Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
2.4.5.G1
The Rule of 72can help you determine
How long it will take for money to double
when interest is compounded
The interest rate an investment must
earn to double in a specific time period
How many times money will double in
a specified time period
Page 22
© Take Charge Today – June 2016– Rule of 72– Slide 22Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
2.4.5.G1
Things to know about the Rule of 72
It’s only an approximation
Assumes the interest rate stays constant
Does not allow for additional
contributions beyond the original principal
Does not account for taxes or fees
Page 23
2.4.5.G1
© Take Charge Today – June 2016– Rule of 72– Slide 23Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Any questions?