Make Today Count Rule of 72

Start today! Take action because ...The Rule of 72 is Cool! When people invest money, they do it so they can make money. That’s called "getting a return on your investment.” Sometimes they want to know how long it will take to double their investment. To do this, we use the Rule of 72.

Take 72 and divide it by the amount of return on your investment. That is the number of years it will take to double your original investment.

For example: Ten year-old Keanu buys a bond for $10,000 and earns 6%. 72 divided by 6 = 12. So every 12 years, Keanu’s money doubles. When he is 22, he will have $20,000.

What if Keanu leaves that money alone until he retires at 60 years old? His money will double 4 times by then and he will have $160,000.

Let’s say Keanu used that original $10,000 and bought a stock that earns 12% return (72 divided by 12 = 6) he will have $20,000 in 6 years when he is 16. If he leaves that money alone until he retires, it will double 8 times and he will have over $2.5 million when he is 60 years old.

The Rule of 72 is based on a principle called “compound interest” (return), which is sometimes called “The 8th Wonder of the World”!

Go Team!  Brett Ellen, The Kids Finance Coach

Tell your money where to go

A great quote I want to share...it will get you thinking.  "It is better to TELL your money where to go than to ASK where it went."  April is Financial Literacy Month and as The Kids Finance Coach you'll see extra postings and resources right here and I invite you to click the learning center tab at  www.afn-net.com

The Rule of 72 is Cool

When people invest money, they do it so they can make money. That’s called "getting a return on your investment.” Sometimes they want to know how long it will take to double their investment. To do this, we use the Rule of 72.

Take 72 and divide it by the amount of return on your investment. That is the number of years it will take to double your original investment.

For example: Ten year-old Keanu buys a bond for $10,000 and earns 6%. 72 divided by 6 = 12. So every 12 years, Keanu’s money doubles. When he is 22, he will have $20,000.

What if Keanu leaves that money alone until he retires at 60 years old? His money will double 4 times by then and he will have $160,000.

Let’s say Keanu used that original $10,000 and bought a stock that earns 12% return (72 divided by 12 = 6) he will have $20,000 in 6 years when he is 16. If he leaves that money alone until he retires, it will double 8 times and he will have over $2.5 million when he is 60 years old.

The Rule of 72 is based on a principle called “compound interest” (return), which is sometimes called “The 8th Wonder of the World”! In other words its really cool.

Here’s something VERY important to remember. Just because things happened in the past, doesn’t guarantee they’ll happen in the future. So we use historical return rates as an example. It doesn’t mean that if you invest in the stock market today, that you will receive 12% return on your investment every year. Also, when investing in stocks it is possible to lose money, so that the value of the stock could be less than the original investment.

 

So my message is ... start learning about how to invest your money wisely now.

Make Today Count

Start today!  Take action because ...
The Rule of 72 is Cool!  When people invest money, they do it so they can make money. That’s called "getting a return on your investment.” Sometimes they want to know how long it will take to double their investment. To do this, we use the Rule of 72.

Take 72 and divide it by the amount of return on your investment. That is the number of years it will take to double your original investment.

For example: Ten year-old Keanu buys a bond for $10,000 and earns 6%. 72 divided by 6 = 12. So every 12 years, Keanu’s money doubles. When he is 22, he will have $20,000.

What if Keanu leaves that money alone until he retires at 60 years old? His money will double 4 times by then and he will have $160,000.

Let’s say Keanu used that original $10,000 and bought a stock that earns 12% return (72 divided by 12 = 6) he will have $20,000 in 6 years when he is 16. If he leaves that money alone until he retires, it will double 8 times and he will have over $2.5 million when he is 60 years old.

The Rule of 72 is based on a principle called “compound interest” (return), which is sometimes called “The 8th Wonder of the World”! I’ll explain more about compound return in my next post.

Here’s something VERY important to remember. Just because things happened in the past, doesn’t guarantee they’ll happen in the future. So we use historical return rates as an example. It doesn’t mean that if you invest in the stock market today, that you will receive 12% return on your investment every year. Also, when investing in stocks it is possible to lose money, so that the value of the stock could be less than the original investment.

Pay Attention, Parents. This One’s for You!

Who are our children’s first teachers? That’s right…parents. April is Financial Literacy Month, so I’m doing what I can to help kids understand and become comfortable with financial concepts. Here’s a list of things YOU can be doing to help teach the valuable skill of money management to your child.
Ten Tips for Teaching Kids about Money

1. It’s never too early to start talking about money with your kids.
2. Don’t make personal finance topics taboo from kids. Talking about money is a learning opportunity. Any discussion is better than silence.
3. Consider giving your kids an allowance. Set expectations about spending, saving and giving to charity.
4. Encourage your kids to make their own money. That way, they connect work to money. Money is a means to an end, not an end in itself.
5. Teach your child to ask, “how can I earn that?”
6. Make sure saving is a habit. Reinforce it. Don’t forget to do it yourself.
7. Don’t say “we can’t afford it”, say “we don’t need that right now.”
8. Keep talking about issues like debt and credit with teenagers, even if they act like they are not listening. Credit/debit cards can feel like plastic funny money.
9. Kids remember and copy parents’ behavior. So model good stewardship of money no matter how much you have. Discuss the basics of budgeting.
10. Think of a financial planner as a resource. Just ask. They can help you talk with your kids about money.

Six Simple Steps to a Savings Plan

Build from the ground up with solid foundation!
• STEP SIX - Review Your Progress
Are you on track to reach your goals? How long will it take? Do you need to make any adjustments?
• STEP FIVE - Identify Your Earnings Plan
Will you be getting an allowance? Would you like to get a job? What other income can you expect?
• STEP FOUR - Establish a Savings Vehicle
Do you want to save your money at home? Do you want to open a bank account? Do you want to start a collection?
• STEP THREE - Set Up a Budget
How will you earn money? How much money will you need to reach your goals? How will you divide your money if you are saving for 2 budget items?
• STEP TWO: Set Your Goals
What are your financial goals? What do you WANT and what do you really NEED? What do you need now and what can wait a few months or even a year?
• STEP ONE: Get Educated
Where does money come from? How does a bank earn money? How can you make your money grow in value? What is compound Interest? (Hint: Check this blog’s archives. I’ve answered these questions before.)

When A Company Needs Money, How Do They Get It?

When a business needs money, they can get it one of two ways. They can sell part of it – or they can borrow. Whey they sell stock, they sell part of the company. But a company may not want to give away ownership of all of the company. They may prefer for you to invest in their company as a bondholder. A bond is a promise to pay off the loan. So if they need money, they may want to borrow it – so they sell bonds – and promise to pay back the loan.

Now, let’s say the company does really well, and the value of the company increases. Does the value of your bond increase? No – because it’s just a promise to repay the loan. But if you own stock in a company, and the value of the company goes up, then your stock is worth more.

What is Compound Interest?

There are two kinds of interest – simple interest and compound interest. You probably know how simple interest works.

For example: If I have $10,000 and I earn 6% interest, how much money do I earn after one year?
Answer: $600

If I earned 6% every year for 12 years how much money would I have earned in interest?
Answer: $600 per year x 12 years = $7200. So adding that to my initial investment, I’d have a total of $17,200

Compounding Interest
If I have $10,000 and I earn 6% compounding interest, how much money do I earn in interest?

Answer: Well, if I apply the “Rule of 72” (which we discussed in our last post) 72 divided by 6 (the rate of interest) = 12. That means my total money will double in 12 years to $20,000.

So why is the total amount of money higher with compounding interest than with simple interest ($20,000 compared with $17,200) if they both receive 6% interest?
Answer: With simple interest I earn the same amount of interest each year on the original $10,000. So every year I only receive $600. With compounding interest, I add $600 (interest) to my original $10,000. Then the next year I earn 6% on $10,600 which is $636. When added together I have $11,236. The following year I earn 6% on that amount

End of year 1 - $600 + $10,000 = $10,600
End of year 2 – 6% x $10,600 = $636. $636 + $10,600 = $11,236
End of year 3 – 6% x $11,236 - $674.16. $647.16 + $11,236 = $11,883.16
End of year 4 – 6% x $11,883.16 - $712.99. $712.99 + $11,883.16 = $12,596.15
End of year 5 – 6% x $12.596.15 - $755.77. $744.77 + $12.596.15 = $13,391.92

Do you see how this is calculated? Dan you continue to do the math?

The Rule of 72 is Cool!

When people invest money, they do it so they can make money. That’s called "getting a return on your investment.” Sometimes they want to know how long it will take to double their investment. To do this, we use the Rule of 72.

Take 72 and divide it by the amount of return on your investment. That is the number of years it will take to double your original investment.

For example: Ten year-old Keanu buys a bond for $10,000 and earns 6%. 72 divided by 6 = 12. So every 12 years, Keanu’s money doubles. When he is 22, he will have $20,000.

What if Keanu leaves that money alone until he retires at 60 years old? His money will double 4 times by then and he will have $160,000.

Let’s say Keanu used that original $10,000 and bought a stock that earns 12% return (72 divided by 12 = 6) he will have $20,000 in 6 years when he is 16. If he leaves that money alone until he retires, it will double 8 times and he will have over $2.5 million when he is 60 years old.

The Rule of 72 is based on a principle called “compound interest” (return), which is sometimes called “The 8th Wonder of the World”! I’ll explain more about compound return in my next post.

Here’s something VERY important to remember. Just because things happened in the past, doesn’t guarantee they’ll happen in the future. So we use historical return rates as an example. It doesn’t mean that if you invest in the stock market today, that you will receive 12% return on your investment every year. Also, when investing in stocks it is possible to lose money, so that the value of the stock could be less than the original investment.