I had the chance to play teacher for a few days with a terrific group of middle schoolers. What did I teach? You get one guess. Yep- money! While keeping the attention of 6th and 7th graders was a real lesson for me- I also discovered how interested this age group really is in figuring out how to earn, grow and save money.
Today I want to share the lesson they loved – Doubling Your Money using the The Rule of 72.
A long time ago a math wiz discovered that if you use the number 72 in certain mathematical equations, you can figure out two things:
• How long it takes to double your money
• What interest rate you need to double your money
Creating the Rule of 72. BTW you don’t have to be a genius to put these equations to work for you. But if you like equations- here they are!
72 ÷ interest rate = the number of years it will take to double money
72 ÷ the number of years you want to double your money = the interest rate you need
You can use these equations with whatever the going interest rate is. And, you can use the answer to figure out how to double any amount of money.
Dividing 72 by the interest rate
72 ÷ 4 (the interest rate) = 18 (years)
At a 4 percent interest rate, your money will double in 18 years.
If the interest rate is 8 percent, how long will it take for your $50 to double?
72 ÷ 8 (the interest rate) = 9 (years)
So you can see, the higher the interest rate, the faster your money doubles.
I know what you are thinking, “I have to wait 18 years to turn my $50 into just $100? Seriously!”
Chances are you’re going to save a lot more than $50 over the course of 18 years. Each time you make a deposit into your account, it, too, will double in value in 18 years if it earns 4 percent interest.
Ok, let’s use the second equation to find out what interest rate we need to double our money. Again, you can use any amount of money. In my example below, we used $50 again.
So you want your $50 to double in four years so you can use it toward college expenses. What interest rate will you need to double your money?
Divide 72 by the years in which you want to double your money.
72 ÷ 4 (years) = 18 (the interest rate)
You think, “Wow, 18 percent is pretty high, I don’t think I can earn that rate right now.” So you decide to wait 8 years for your money to double. What interest rate do you need now?
72 ÷ 8 (years) = 9 (the interest rate)
You need 9 percent interest to double your money in 8 years.