Money Concepts – Compound Interest and Rule of 72
4 Steps To Financial Strength
July 30, 2020
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August 9, 2020
Understanding Compound Interest
One of the fundamental money concepts is Interest.
Interest, to give a very basic example, is often a “price” that is paid to borrow money. Compound interest is when interest is added to the starting amount, or principal, so that the interest that has been added also earns interest.
With compound interest, you earn interest on the money you save and on the interest that money earns. Over time, even a small amount saved can add up to big money. Whether you realize it or not, the concept of interest is a big part of your financial life because the possibility of earning interest is why people lend and borrow money.
What Does This Mean?
Your money can work for you when “your money earns money”. When your money goes to work, it may earn a steady paycheck. Someone pays you to use your money for a period of time. When you get your money back, you get it back plus “interest.” Your money can make an “income,” just like you. You can make more money when you and your money work.
The Rule Of 72
The Rule of 72 is a mathematical formula used to estimate the amount of time it would take for an amount to double using Compound Interest.
This formula is very useful because it helps you estimate how much time you need and what kind of interest rate you need to reach your financial goals.
The Rule Of 72 Formula: Divide The Interest % Into 72 To Estimate The Number Of Years To Double Your Principal*.
- Compound Interest - Working For You
- Compound Interest - Working Against You
- Your Money Working For You
This example shows how compound interest can work in your favor by doubling your money after a certain number of years depending on the interest rate you are earning on your principal.
We can use the Rule of 72 to calculate the amount of time required.
- 72 / 4% = 18 Years To Double
- 72 / 8% = 9 Years To Double
All Figures Are For Illustrative Purposes Only.
*This Is A Hypothetical Scenario Used For Illustrative Purposes And Does Not Reflect The Results Of Any Specific Investment. The Actual Time It Will Take An Investment To Double In Value Cannot Be Predicted With Absolute Certainty Because Performance Of Investments Fluctuate Over Time.
Money Concepts - Inflation
What Is Inflation?
The simplest way to think of Inflation is as an increase in the price you pay for goods and services. In other words, a decline in your purchasing power.
Every year, the United States Department of Labor takes prices of a variety of products and services. This information is used by many economists to calculate an average inflation rate. The average annual inflation rate since 1913 has been 3.2% per year.*
This means, 10/20/30 years from now, ordinary goods will likely cost more and you will be able to buy less with the same amount of money as today.
What Does This Mean For Me?
Based on historical averages, your buying power is going to decrease an average of over 3% every year. That means when you plan for the future, you have to take into account that your money in the future will probably buy less than it does now. In other words, in the future, you might need more money to buy the same things as you can today with less money.
What Can I Do?
One thing to consider when investing or accumulating assets is to think about whether the interest you are earning is going to be higher than the rate of inflation over the same amount of time. If your rate of return is lower than inflation, you may not really be “growing” your money.
TAXES
Taxes
Most people have heard it said that nothing is certain except for death and taxes. However, most people probably don’t realize how literal this statement is.
For example, if you have a large estate when you pass away, the value of your estate above an exemption amount is subject to an estate tax. This means some people can’t even avoid taxes by dying.
While many realize that state and federal taxes take a large bite out of their paychecks, most people don’t realize that there are taxes for more than just the money you earn.
An important part of accumulating assets is to plan and strategize to minimize the effect of those taxes on your financial goals.
Market Risk
What Is Market Risk?
One factor that most people do not consider carefully when investing their money is the concept of Risk.
Market Risk refers to the possibility that the value of your investment will go down because of changes in the broader economy that you cannot control. Examples of these changes include stock prices, interest rates, currency exchange rates, commodity prices, and many other factors.
What Can I Do?
In many cases, the investments or strategies that offer higher rewards, also have higher market risk. It is important to balance possible reward with possible risk when making plans for the future.
There are financial solutions available that help establish a stable financial future while protecting against the downsides of market risk.
Please Note: The Material On This Website Is Intended For Informational Purposes Only. Neither Syncis, Inc. Nor Its Affiliate Companies Authorize Its Agents, Employees Or Representatives To Give Legal, Tax Or Accounting Advice. Please Consult The Appropriate Professional For Legal, Tax, Or Accounting Advice.
This Information Is Not Intended To Be Specific Advice To Purchase, Sell, Liquidate, Surrender, Replace, Or Withdraw From A Particular Mutual Fund, Variable Insurance Product, Stock, Bond, Or Any Other Security.
