What is the Rule of 72?
Investopedia Financial Dictionary:
A rule stating that in order to find the number of years required to double your money at a given interest rate, you divide the compound return into 72. The result is the approximate number of years that it will take for your investment to double.
For example, if you want to know how long it will take to double your money at 12% interest, divide 12 into 72 and you get six years.
Many of us have big ticket items (> $4,000) we have purchased and then just let collect dust. I’ll never forget that pool table I just could not live without another year. We went out and purchased it on “90 days – same as cash” which by the way is not a true statement. We knew we could put aside $1,500 a month but instead of saving for three months and paying cash we WANTED it now. The problem was that our refrigerator went out after 5 years and we had to wait an extra month, then we needed brakes and needed to wait another month. I am sure you are getting the point. When you buy on credit you are taking a huge RISK and it is what leads to financial disaster in many homes across America. Now I am not against buying big ticket items but do NOT buy them on credit. Save and pay cash – what a novel idea. Below are ten items that would be considered wants and not needs. You could probably list many more. You WANT a brand new Lexus but you NEED transportation.
1. New Car
3. Home Furnishings
4. Season tickets to a sporting event (I mean your own box)
6. Theater room
7. Pool table
8. Mustang you will rebuild
10. Hot Tub (Come on – you gotta have the hot tub – especially when it snows!)
Now let’s take a $4,000 big ticket item and instead put it in a Roth IRA earning 12% interest. Using the Rule of 72 if we never touched the $4,000 and put it in at age 25 by the retirement age of 67 you would have over $500,000 in the account you could start withdrawing tax free. Wow!!!!!
Here are 5 simple steps in coming up with a “GAME PLAN” to purchase that big ticket item that you MUST have now!
1. Get on a Budget
2. Have an Emergency Fund of at least $1,000
3. Have all consumer debt paid off – especially credit cards
4. Agree with your spouse (if married) on the purchase
5. PAY CASH (You will probably appreciate it much more)