Rule of 72

Before I discuss the impacts of inflation, I need to lay the foundation of how interest works, particularly compound interest. Albert Einstein discovered the Rule of 72, which demonstrates approximately how long your money will take to double. He was quoted as saying "It is the greatest mathematical discovery of all time." Also credited to him are "Compound interest is the most powerful force in the universe" and "it is the 8th wonder of the world."

Here is how it works. You take the interest rate you are earning, divide that by 72, the result will be the number of years for your money to double. For example, say you earn 6% per year in your mutual fund. 72/6=12. Your money will double every 12 years.

When you invest, the rule of 72 works for you by growing your money. When you borrow, it works against you and you are mortgaging your future for the present. It will take you so much longer and cost far more to pay it in the future than it would now.

Below is a chart showing the results of $1000 invested at various interest rates and the growth occurring in various years ending in year 24.

	$1,000
	3%	6%	9%	12%	18%	24%	36%
yr 1
yr 2							$2,000
yr 3						$2,000
yr 4					$2,000		$4,000
yr 5
yr 6				$2,000		$4,000	$8,000
yr 7
yr 8			$2,000		$4,000		$16,000
yr 9						$8,000
yr 10							$32,000
yr 11
yr 12		$2,000		$4,000	$8,000	$16,000	$64,000
yr 13
yr 14							$128,000
yr 15						$32,000
yr 16			$4,000		$16,000		$256,000
yr 17
yr 18				$8,000		$64,000	$512,000
yr 19
yr 20					$20,000		$1,024,000
yr 21						$128,000
yr 22							$2,048,000
yr 23
yr 24	$2,000	$4,000	$8,000	$16,000	$40,000	$256,000	$4,096,000

Now, let's say you have $5000 instead of $1000 and look at the difference.

	$5,000
	3%	6%	9%	12%	18%	24%	36%
yr 1
yr 2							$10,000
yr 3						$10,000
yr 4					$10,000		$20,000
yr 5
yr 6				$10,000		$20,000	$40,000
yr 7
yr 8			$10,000		$20,000		$80,000
yr 9						$40,000
yr 10							$160,000
yr 11
yr 12		$10,000		$20,000	$40,000	$80,000	$320,000
yr 13
yr 14							$640,000
yr 15						$160,000
yr 16			$20,000		$80,000		$1,280,000
yr 17
yr 18				$40,000		$320,000	$2,560,000
yr 19
yr 20					$160,000		$5,120,000
yr 21						$640,000
yr 22							$10,240,000
yr 23
yr 24	$10,000	$20,000	$40,000	$80,000	$320,000	$1,280,000	$20,480,000

Look at the huge difference of $5000 versus $1000 in 24 years at 36% - $4 million versus $20 million! Or look at the difference between $5000 at 12% interest and 36% interest - $80,000 versus $20 million! Of course, if you start out with more, the bigger the numbers get.

Now imagine what the credit card companies are earning on your money when they are charging you 18% or more interest on your credit card debt. Imagine having to pay them that much by letting your credit cards get out of control.

Remember the parable of the ten minas in Luke 19.

Why then didn't you put my money on deposit, so that when I came back, I could have collected it with interest? Luke 19:23 (NIV)

and verse 26 ...
He replied, "I tell you that to everyone who has, more will be given, but as for the one who has nothing, even what he has will be taken away."