economicmultipliers_128

Economic Multipliers (128)

Do you know what these are?

They help CREATE wealth in systems.

The ‘Rule of 72’ is an economic multiplier if it helps people understand the value of saving money for their future.

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The ‘Rule of 72’ is a quick way to calculate approximately how long it will take for money to double if it is invested (and reinvested).

If you are saving money for the future (hopefully you can and are) and the money earns interest (or dividends … which you reinvest versus spend), 72 divided by the interest rate gives the approximate number of years it takes for your money to double.

• at 0.1 percent interest … approximately 720 years

• at 1 percent interest … approximately 72 years

• at 10 percent interest … approximately 7.2 years

It is also possible to identify the approximate interest rate required to double your money in a certain number of years:

• 2 years: 72/2 = 36%

• 5 years: 72/5 = 14.4%

• 12 years: 72/12 = 6%

Keep in mind that these numbers are approximate. Interest can be compounded numerous ways: daily, monthly, quarterly, semi-annually, annually, etc. At any given interest rate, the more frequent the compounding, the greater the overall return over time: Interest starts earning interest.

Wikipedia does a nice job of explaining some of the math behind the estimation and takes the time to explain why some people use ‘The Rule of 70’ or the ‘Rule of 69.3’ or other ‘adjusted’ rules for quick calculations which are more accurate (search on ‘Rule of 72’).

If you take the time to learn to use financial calculators, you can accurately calculate the same numbers that your savings institution does.

Low interest rates at banks and savings institutions for people who highly value secure insured investments make it harder for savers to earn money on the money they save for their futures.

Low interest rates at banks and financial institutions for individuals who borrow money for businesses, education, homes and cars make it easier for businesses and individuals to get financially grounded in their communities.

High interest rates don’t necessarily make it easy to save and compound the value of money or the value of anything. If you need to spend all of your money just to get by, it’s not possible to save or invest in anything or take advantage of compound interest.

Low interest rates don’t necessarily make it easy to invest in businesses, education, homes and cars: You still need to have a means to pay off any money that is borrowed and that requires some form of income and good financial planning.

High interest rates can show up in the form of inflation (when product prices rise) and change how people think about investing. As an example, if automobile prices were increasing 20 percent per year, banks were paying 5 percent on savings and business loans cost 10 percent, a taxi driver might find it more ‘valuable’ to invest in a fleet of taxis that retained value, generated revenue and helped build a business that could ultimately be sold.

Investing in assets that generate a return (which is what businesses are) is another way to build value and equity.

Of course, this is a ridiculous example. If automobile prices increased 20 percent per year, the cost of a car would double in less than 4 years. Likewise, business loans wouldn’t cost 10 percent if automobile prices were increasing at 20 percent per year.

However and wherever you invest your money, assets, education and time (all of these have value from an investment perspective and all have the ability to generate a return), I hope you create value for yourself as well as others and hope that you as well as your community get an excellent return.

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Finding money so you can save it:

Thousands of articles can be found online regarding cutting costs for things you traditionally do or buy. If you find a way to reduce an expense and can save the money versus spend it, it’s possible to take greater advantage of compound interest.

Likewise, thousands of articles can be found regarding increasing sources of income. If you can find a way to earn some extra money that you do not immediately need to spend, once again, it’s possible to take greater advantage of compound interest.

And, never discount the value of the compound interest found in investing in personal or business-related items which create a long term return. Of course, you still need to find a way to ‘save’ some of that value.