The Rule of 72 › uploads › 1 › 9 › 1 › 5 › 1915623 › rule… · 2.4.5.G1 © Take...

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2.4.5.G1 © Take Charge Today –June 2016 – Rule of 72– Slide 1 Funded 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.

Transcript of The Rule of 72 › uploads › 1 › 9 › 1 › 5 › 1915623 › rule… · 2.4.5.G1 © Take...

Page 1: The Rule of 72 › uploads › 1 › 9 › 1 › 5 › 1915623 › rule… · 2.4.5.G1 © Take Charge Today –June 2016 –Rule of 72–Slide 3 Funded by a grant from Take Charge

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© 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: The Rule of 72 › uploads › 1 › 9 › 1 › 5 › 1915623 › rule… · 2.4.5.G1 © Take Charge Today –June 2016 –Rule of 72–Slide 3 Funded by a grant from Take Charge

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© 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: The Rule of 72 › uploads › 1 › 9 › 1 › 5 › 1915623 › rule… · 2.4.5.G1 © Take Charge Today –June 2016 –Rule of 72–Slide 3 Funded by a grant from Take Charge

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© 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

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© 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: The Rule of 72 › uploads › 1 › 9 › 1 › 5 › 1915623 › rule… · 2.4.5.G1 © Take Charge Today –June 2016 –Rule of 72–Slide 3 Funded by a grant from Take Charge

© 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

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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: The Rule of 72 › uploads › 1 › 9 › 1 › 5 › 1915623 › rule… · 2.4.5.G1 © Take Charge Today –June 2016 –Rule of 72–Slide 3 Funded by a grant from Take Charge

© 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

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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

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© 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: The Rule of 72 › uploads › 1 › 9 › 1 › 5 › 1915623 › rule… · 2.4.5.G1 © Take Charge Today –June 2016 –Rule of 72–Slide 3 Funded by a grant from Take Charge

© 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

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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: The Rule of 72 › uploads › 1 › 9 › 1 › 5 › 1915623 › rule… · 2.4.5.G1 © Take Charge Today –June 2016 –Rule of 72–Slide 3 Funded by a grant from Take Charge

© 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

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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: The Rule of 72 › uploads › 1 › 9 › 1 › 5 › 1915623 › rule… · 2.4.5.G1 © Take Charge Today –June 2016 –Rule of 72–Slide 3 Funded by a grant from Take Charge

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: The Rule of 72 › uploads › 1 › 9 › 1 › 5 › 1915623 › rule… · 2.4.5.G1 © Take Charge Today –June 2016 –Rule of 72–Slide 3 Funded by a grant from Take Charge

© 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

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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: The Rule of 72 › uploads › 1 › 9 › 1 › 5 › 1915623 › rule… · 2.4.5.G1 © Take Charge Today –June 2016 –Rule of 72–Slide 3 Funded by a grant from Take Charge

© 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

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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

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© 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

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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

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© 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

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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?

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© 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

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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: The Rule of 72 › uploads › 1 › 9 › 1 › 5 › 1915623 › rule… · 2.4.5.G1 © Take Charge Today –June 2016 –Rule of 72–Slide 3 Funded by a grant from Take Charge

© 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

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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

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© 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

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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

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© 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?

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© 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?

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© 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

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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: The Rule of 72 › uploads › 1 › 9 › 1 › 5 › 1915623 › rule… · 2.4.5.G1 © Take Charge Today –June 2016 –Rule of 72–Slide 3 Funded by a grant from Take Charge

© 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: The Rule of 72 › uploads › 1 › 9 › 1 › 5 › 1915623 › rule… · 2.4.5.G1 © Take Charge Today –June 2016 –Rule of 72–Slide 3 Funded by a grant from Take Charge

© 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: The Rule of 72 › uploads › 1 › 9 › 1 › 5 › 1915623 › rule… · 2.4.5.G1 © Take Charge Today –June 2016 –Rule of 72–Slide 3 Funded by a grant from Take Charge

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© 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?