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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.

Investopedia Says:

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

2. Motorcycle

3. Home Furnishings

4. Season tickets to a sporting event (I mean your own box)

5. Boat

6. Theater room

7. Pool table

8. Mustang you will rebuild

9. Vacation

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)

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