Make it your New Year’s Resolution for 2011 to learn and take full advantage of the Rule of 72. Compound interest is by far one of the most powerful principles that can help you reach your financial goals.
Ladies, I want to demonstrate to you a simple example of compound interest and how powerful this concept is. Imagine the following scenario.
You are providing a one-time service for someone that lasts one month, and
that customer gives you a choice of two options of payment.
Here are the two options:
1) At the end of your service, the customer pays you $100,000 lump sum payment. Not bad, eh? OR
2) At the end of your service, the customer pays you $1 the first day, and shows you a technique whereby you can double this amount everyday for the next 31 days.
Which would you choose?
Well, let’s look at Option #1 first since it is the easiest – at the end of your 31 days, assuming you did not spend any of the money yet, you would have $100,000. And I must admit, that sounds pretty good, especially considering the fact that the average person will not make that in a year, let alone one month.
Now, let’s look at Option #2. Do me (and yourself) a favor and get out a calculator. And if you don’t have one, get out your cell phone. I’ll bet you have a calculator on it that you can use. To recap, you are given $1 the first day and then it doubles everyday for the next 31 days. So, on day 2, your $1 becomes $2, on day 3, your $2 becomes $4, on day 4, your $4 becomes $8, and so on.
If you start with $1 and multiply it by 2 and take its result and multiply by 2, and so on for 31 days, what do you get? Well, here’s what I got…….drum roll please……$1 billion, 73 million, 741 thousand, and 824. YES! I said billion with a “b.” I don’t know about you, but that’s pretty phenomenal….the POWER of compound interest.
Now, which option would you choose? Option 2 of course!
Results:
1) 31 days - $100,000
2) 31 days - $1,073,741,824
Rule of 72
The Rule of 72 applies here as well. What is the Rule of 72? If you divide 72 by the annual interest rate, the result is how many years it would take your one time investment to double. That is the power of compound interest. For instance, an initial one-time investment of $10,000 at a rate of return of 12% would take 6 years to double into $20,000.
Now, returning to the first scenario, where you have the two payment options. The second option entailed learning a technique where you could double your money every day. And yes, I must admit, this sounds pretty far-fetched. Basically, you would need to make 100% profit (or double your investment) every day for 31 consecutive days in order to become a billionaire, with a “b.” Well, what if I could show you a technique that may take a little longer, say you could double your investment in a year? And before you say “that’s impossible” I want you to know that I have done it before. How you might ask? By trading in the stock market.
All the best to you in the New Year!
Aneshia