According to Jordan Rosenfeld’s April 2022 article Financial Literacy Around the World: Top 10 Countries and the U.S., published in Yahoo Finance, the United States does not rank in the top ten. One of the richest countries in the world is average at best in financial literacy. In other countries, kids are taught about money at a very young age - not just from their family, but also as a requirement in their formal education. In the U.S., most kids are not taught financial terms and concepts until they are in high school; and even then, it is only an elective course.
So, I was thinking that with the holidays fast approaching and families getting together, now might be a good time for us to learn and teach our kids and grandkids one of the most important financial principles ever – the time value of money. It’s quick, it’s easy to understand, and most of all, it will help your child/grandchild make good, sound financial decisions for the rest of their life.
The Rule of 72 goes like this: If you invest $1 at 1% for 1 year, you will have $1.01 at the end of that year. If you keep that amount invested at 1%, at the end of year 2 you will have $1.0201. After 3 years you will have $1.030201. Eventually, after 72 years, that $1 will grow into approximately $2. So, $1 at 1% will double in 72 years.
Now take any rate of growth and divide it into 72. The result is the approximate number of years it will take $1, or any amount of money, to double. For example, $1 at 2% will double in 36 years; $1 at 4% will double every 18 years; $1 at 6% will double every 12 years, etc.
Show them how a $1000 grows at these different rates. Write it on paper so they can SEE it.:
$1000 @ 4% $1000 @ 6% $1000 @ 8%
$2000 after 18yrs $2000 after 12 yrs $2000 after 9 yrs
$4000 after 36 yrs $4000 after 24 yrs $4000 after 18 yrs
$8000 after 36 yrs $8000 after 27 yrs $16000 after 36 yr
Notice how just a small change in rate of growth changes the result exponentially over the same time period. This can be a strong motivator for them to save and be disciplined in how they use their money.
The Rule of 72 not only shows them how fast their savings and investments can grow, but just as importantly, it shows them how fast debt can grow. When they don’t pay their credit cards off in a timely manner, a $1000 worth of debt can get out of control quickly. These days, young consumers are bombarded with opportunities to “pay for it later” and to “enjoy 0% interest” for a certain period of time. When that time period has expired, the balance begins to grow, often at rates as high as 18% or more. Imagine your debt doubling every 4 years!
I hope readers will find this helpful and can pass it along to their kids and grandkids. Maybe you will find that opportunity over the holidays. Either way it’s important that the younger generations understand how money works. Our society teaches them how to spend money; it is up to us to teach them do it wisely.
Note: Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
This is a hypothetical example and is not representative of any specific situation. Your results will vary. The hypothetical rates or return used do not reflect the deduction of fees and charges inherent to investing.