An early understanding of The Rule of 72 is critical to youth financial literacy
Understanding early on how money grows is important. Time is a key component to building a respectable savings for later in life. The Rule of 72 helps investors understand how long it will take for their initial investment to double.
Hindsight is both an amazing and a frustrating thing. When you reach the middle of your life you can look back and see so clearly all the things that were somehow out of sight when you were young. Adults interacting with youth on financial education topics can help young people learn some important principles to guide them in making positive financial decisions while they are young.
One area that hindsight has shown me I would have benefited from knowing more about is in the power of time and money and The Rule of 72. Investopedia defines the rule as “a simplified way to determine how long an investment will take to double, given a fixed annual rate of interest.” If an investor divides 72 by the interest rate being offered he or she can determine approximately how long it will take for their initial investment to double. For example: if a person invests two-thousand dollars at an interest rate of eight percent, it will take approximately nine years for their money to double (72 ÷ 8 = 9).
Even better is that this will continue to happen at least every nine years provided the interest rate stays at eight percent, even if the investor never contributes another dollar. This phenomenon is called the time value of money. With this in mind it isn’t hard to realize that the sooner you begin investing your money, the more time it has to grow new money.
The salient point here is that the amount available to you at retirement will be greater if you start sooner versus later. A person who starts the same savings account in his or her 30’s can contribute three and a half times as much money to their fund and it still won’t grow into the same size nest egg as the person who starts saving in their late teens. Financial guru, Dave Ramsey, in a YouTube video uses the same Time Value of Money Calculator charts as the National Education for Financial Education to illustrate how compound interest works.
In hindsight, understanding The Rule of 72 would have encouraged me to focus earlier in life on the importance of building a savings or investment account. Take what you’ve learned, invest now and watch the money grow!