An early understanding of the Rule of 72 is critical to youth financial literacy
The Rule of 72 helps investors understand how long it will take for their initial investment to double.
Understanding at an early age how money grows is important. Time is a key component to building a respectable savings for later in life. Helping youth understand the power of compound interest and the Rule of 72 is a simple way to prepare youth to utilize their investing advantage of time.
The Rule of 72 provides an estimate on the number of years it will take money to double in respect to the interest rate. To use, divide 72 by the expected annual rate of return to get the number of years it will take your money to double in value. For example, if a person invests $2,000 at an interest rate of 8%, it will take approximately nine years for their money to equal $4,000 (72 ÷ 8 = 9).
Even better is that this will continue to happen at least every nine years, provided the interest rate stays at 8%, even if the investor never contributes another dollar. This phenomenon is called the time value of money. With this in mind, it isn’t hard to realize that the sooner you begin investing your money, the more time it has to grow new money.
The salient point here is that the amount available to you at retirement will be greater if you start sooner versus later. If you start the same savings account in your 30s, you can contribute 3.5 times as much money to your fund and it still won’t grow into the same size nest egg as the person who started saving in their late teens. In this YouTube video, financial guru Dave Ramsey uses the same Time Value of Money Calculator charts as the National Education for Financial Education to illustrate how compound interest works.
Helping youth understand the Rule of 72 earlier in life can help them focus on the importance of building a savings or investment account. Invest now and watch the money grow.
Michigan State University Extension and Michigan 4-H Youth Development help to prepare young people for successful futures. As a result of career exploration and workforce preparation activities, thousands of Michigan youth are better equipped to make important decisions about their professional future, ready to contribute to the workforce and able to take fiscal responsibility in their personal lives. For more information or resources on career exploration, workforce preparation, financial education or entrepreneurship, contact 4-HCareerPrep@msu.edu.