Perhaps you have already heard of it, or perhaps you haven’t heard of it yet. The rule of 72 is the most powerful rule in all of personal finance. It is a simple formula that has helped the rich get richer. A tool that has helped Canadians build their wealth. At the same time, it is also a powerful weapon used by creditors, banks, and high-interest loan products to keep people in debt. Collecting interest on that debt, of course, is their business.
If you know anything about the rule of 72, it is that it’s an easy formula to help you increase your wealth. However, what many finance specialists won’t tell you is that it is also a tool that can be used against you to keep you in debt. In this article, we will review what the rule of 72 is, how it works, and how it impacts your debt.
What is the rule of 72?
In short, the rule of 72 is a formula to help you estimate how long it will take for an investment you have made to double. By dividing 72 by the annual rate of return, you’ll get an estimate of how many years it will take for your investment to duplicate itself. This reveals the positive effect that compound interest can have on your future ability to buy a house, take a vacation, or retire in comfort.
The rule of 72 looks a little something like this:
Years to Double = 72/Investment rate
Let’s say you invest $1,000 in a GIC. Your rate of return is 4% interest. 72 divided by 4 equals 18. In 18 years, your investment will double to $2,000. It will also continue to double every 18 years.
Or, as another example, let’s say you receive an inheritance of $15,000. Instead of spending it, you decide to invest your money. Your financial advisor says they can get you a 6% annual return on your investment.
So, 72/6 = 12. Therefore, in 12 years, your $15,000 will double to $30,000.
Now for the darker side of the rule of 72
As Albert Einstein once said, the rule of 72 “is the greatest mathematical discovery of all time. He who understands it earns it. He who doesn’t pay it.”
While the rule of 72 sounds amazing to wealth seekers, at 4 Pillars, we have seen firsthand how the rule of 72 can be used to also increase your debt. Where instead of working for you, your compound interest is actually working against you.
Instead of you investing $15,000, let’s turn the tables around and say you have $15,000 of credit card debt. The average interest rate for credit cards in Canada is roughly 18%.
72/18 = 4. This means that in only four years, your debt will double to $30,000 if you only make the minimum payments. In eight years, that debt will double again to $60,000.
This is how banks make huge profits.
This is why banks want to keep their clients in debt.
And this is why bank tellers would prefer to sell you a loan rather than a mutual fund.
Why is the rule of 72 important?
Not only does the rule of 72 help you determine how to invest your money, but it also determines what will happen to your debt. Before you make any investments or take on additional debt, the rule of 72 can help you decide whether you’re making the best decision with your money. By understanding this rule, it could help you avoid putting yourself further into debt. It also helps to explain why even though you’ve never missed a payment, and you consistently make ends meet, you never get off the hamster wheel of debt.
If you are tired of the hamster wheel life, we can help. At 4 Pillars, we see firsthand how the rule of 72 is used against our clients to keep them in debt. But there is a way out. We can help you determine the best route for you to take to get out of debt for good. To get started, book your free consultation with one of our debt relief specialists today. Give us a call at one of our three locations across Northern Ontario. You can reach our Muskoka & Parry Sound office at 705-640-0187, our North Bay office at 705-980-0158, or our Sudbury office at 705-806-1252.
In your battle against debt, you don’t have to go at it alone. We’re here to help when you’re ready. You need a plan, and we are here to custom tailor a get out of debt plan just for you. Everyone’s debt is different. Everyone’s reason for being in debt is different. Don’t be the victim of a one size fits all consumer proposal.