The Rule of 72

Alright, by a show of hands, how many of you have heard of this? Well, I’m going to tell you about it anyway…hehe.

I actually want to thank Joseph over at Debit vs. Credit for reminding me of this story. He wrote a post on the rule of 72 earlier this week. While Joseph’s post talked about the basics of the rule of 72, I’m going to give you an example of how I used it to help a member at the credit union.

First, a little background on the rule. The rule of 72 is used to calculate how long it will take an investment to double at a given interest rate. So, for example, let’s say you had $50,000 in an account that earned 4%, you would take 72/4 = 18. Therefore, it would take 18 years for your investment of $50,000 to reach $100,000. You can get a scientific calculator and figure it out that way if you want, but this method is fairly close and easy to do when you don’t have your scientific calculator in your back pocket.

Ok, so on to my member. I’ve had a member I’ve been working with for several years. He’s followed me around from bank to bank as I’ve moved…that sounds bad, let me rephrase. I’ve only worked for three banks and a credit union. He still has some accounts with the first bank for his regular bills, but his fun money he moves around with me. It’s rather flattering, and considering the week I’ve had with other members, I was super excited to see him this week.

He came in with a check for $75,000 that he wanted to add to his existing funds, which would bring him up to $165,000 and some change. As I made the deposit, I was horrified to find that he’d closed out the high yield money market we had originally opened and he moved the money into his membership share. He went from 4.5% interest to 1%. I asked him what he was doing. He told me that he was worried about losing money in the money market and wanted a safer product. I took this as partly my fault, because when I explained the money market to him, I obviously didn’t make it clear that it was a credit union account that was NCUA insured.

So, I started from square one and talked him through the money market. All that stuff I put in my post about the difference between money market accounts is what I told him. Money market deposit accounts are housed within the credit union and are insured for the same amount as the membership share and checking. Money market fund accounts are the ones that could lose money from market volatility.

Before I explain this next part, let me preface it with the fact that Mr. Customer has very deep pockets. This $165,000 is just a drop in his net worth bucket. He’s moved this money around with me simply because he enjoys my company and he likes that I tell him like it is…basically, he likes that I’m a smart alec. But, he has wealth management professionals that handle the bulk of his money. At any rate, he tells me that it’s no big deal. This is play money, so it’s not like he needs to be overly concerned with the interest.

Must be nice! So, I tell him if he’s got so much to be unconcerned with he should spread the wealth. I’d be happy to put his money to use in my pockets! He just laughed at me.

Anyway, I decide to break out the rule of 72 on him. The membership share he currently has his money in is earning 1% interest. I explain the rule of 72 to him and then write it down on paper so that he can see what I’m doing…I like to draw crazy pictures when I talk numbers. So, I break it down for him. At 1%, it would take 72 years for his $165,000 to double. If he went back to the money market – our rate went up a little – he’d be earning 4.75% on his money and that would only take about 15 years to double. Clearly he’d have more fun in the next 15 years than he would in 72…I teased him on his age and that in 72 years he’d simply have to give his money to me. I was kidding, of course. That’s just the nature of our relationship.

He looks at the number and the frugal, penny-pincher in him came out. He asked if I was absolutely sure that he wouldn’t lose money in this money market account. I smile at him – rather gamine-like, as he says – because I’ve gotten to the root of the problem. It has nothing to do with him not being concerned with the interest, he doesn’t BELIEVE that he won’t lose money in the money market account. It was easy enough to fix. I gave him the literature and disclosures that specifically state that money market accounts are 100% within the credit union and NCUA insured up to $250,000. I eventually got him back into the money market account.

The point is, the money market account was a better product. He knew that, but showing him such a visual representation really hit that fact home. I mean, consider the drastic difference that 3.25% made. He went from 72 years doubling-time to 15 years! I think that’s a pretty powerful presentation I made for him. Having the rule to show him just how much money and time he was wasting, whether it’s play money or not, was a great tool in my arsenal. I think he was impressed too, though he won’t directly admit it. That’s ok. I know the truth and I got him to do the right thing, so that’s enough for me.

What do you guys think? Have you heard of the rule of 72?

9 thoughts on “The Rule of 72”

  1. I thought the “Rule of 72″ was pretty well known until I was having a social conversation with someone in the financial industry, and somehow mentioned this concept – he seemed surprised! I don’t think it’s because he mistook me for a dunce…I think I mistook the rule as common knowledge. It’s darn useful, isn’t it!

  2. I had heard of this back in finance classes, but it had been awhile since I’ve seen it used. This was a great example! I love how you were able to help him out and show him why this was the best way to go, right on paper.

  3. I have never heard of this before, this is neat! Since part of the point of long term saving is planning for the future this is a great tool. Thanks for the post!

  4. I just wrote an article about this on my blog (and linked it to yours here so people can get more information)!

    For the longest time, I’ve been thinking, “why do people get so excited about the Rule of 72? It doesn’t seem that useful to me.” To me, I don’t care so much how long it will take my money to double so much as that I have the amount of money I want by the time I want it. So a financial calculator seems far more useful.

    I appreciated the real life story of how you used it to help someone, and I really connect with your caring and humor. He’s lucky to have you on his side! Keep up the good work.

    Love & Prosperity,

    PJ

    PJ Van Hulle
    Real Prosperity, Inc.
    “Who Says Making Money Can’t Be Fun?”
    http://www.cityscoop.us/bayarea-financialeducation

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