Updated: Dec 28, 2019
DO interest rates matter to you?
You bet they do.
In the world of numbers something stands out about the number 72. It is divisible by 1,2,3,4,6,8,9,12,18,24,36, and itself 72, or 12 different factors. Those factors contain 4 perfect squares. So, 72 is a spicy little number!
The interesting thing about 72 is that this number can be used to estimate compound interest.
Take the interest of your average home loan of 4% and divide into 72. 72 ÷ 4 =18. This means the bank has doubled their money in 18 years. The American homeowner stays in their home an average of 13.3 years. That means at year 13 the portion of your payment dedicated to interest is about the same as your principal. Because your interest portion of your payment is based upon your outstanding balance, at the beginning of your loan you are paying mostly interest to the bank. You have paid a much smaller portion to principal. The homeowner buys another house and resets the principal/interest clock.
Your banker says thank you!
It also means when you go to a rental furniture store to buy that cute little sofa you cannot live without, (and cannot afford) paying 100% interest per year, your furniture store is 72/100 doubling its financial position every .72 years or every 9 months.
Your furniture store says thank you!!
After your done at the furniture store, you need a pay day loan because at the end of the month you have more “month than money”. That sexy little number will cost you about 300% annually in Florida. But you say those nice people only charge me $12.00 per $100. That’s 12%. WRONG! You must repay the payday loan within 14 days…7 days better. If paid in 14 days that equates to 12% every 2 weeks. 52 weeks per year divided by 2 = 26 periods. 26 periods times 12% = 312 %!
Your Pay Day Loan “Officer” says Thank You!!!
This means the payday loan business 72/312 doubles its money every .23 years or about every 3 months!
Of course, the rule of 72 works the same as a saver. The average 1-year CD rate is currently 2.5%. This means you will double your money every 72/2.5 or 28.8 years. Now you know how banks make their money. They double their money every 18 years while yours doubles in 28.8 years. Such a deal!
If you don’t have a budget, if you are drowning in debt, have no savings and no plan to address your financial situation, call Ken Remsen with WalletWise! He’s your financial friend.
Be Wise and be Rich, Wallet Wise www.WalletWise.org