Financial Idea's Blog

How Can I Educate Myself About The Stock Market?

Learning the Rule of 72

Before we go there, I think the first question here really is: “Why should I even invest at all?” The underlying answer that most of us have to that question, even if we don’t say it, is: “That’s too risky. I know people who have lost everything doing that.  I’m not that dumb, I’ll just save in a savings account.”

Learning the Rule of 72

So the first answer to educating yourself is to ask yourself: “Do I know what the Rule Of 72 is?” and “How does it affect me, anyway?”

What Is The Rule Of 72?

The Rule Of 72 goes back at least many hundreds of years.  Luca Pacioli, an Italian mathematician, referenced it sometime during the 15th century as a convenient way to determine how long it takes your money to double, assuming you know the interest rate it earns. Luca didn’t explain the rule much, meaning it probably goes back even further than that, but the principle still holds true today.

Here’s an example:  start with any amount of money; let’s say $100.00 to be simple.  You invest it at 10%.  Using the simplest of math, you take 72 and divide it by 10, and you get the number 7.2, which means your money will double to $200.00 in 7.2 years.
If you have $100.00 and you invest in at 7.2%, you take 72 and divide it by 7.2, and you get the number 10, which means your money will double to $200.00 in 10 years.

The same exact principle is true if you start with $100.00 or $100,000.00.  That’s all the harder it is.

Now, is it accurate? Well, not precisely.  The Rule Of 72 is a good general estimation if you assume that your interest compounds once per year, when actually it might compound monthly or daily – but if it does, that’s only to your benefit.  There are financial calculators which are much more accurate, but this is a simple idea that gives you a good general working answer.
How Does It Affect Me, Anyway?

Let’s assume you really are thinking like our hypothetical person at the start of this article, and you “know better” than to get into the stock market, so you just dump some money every month into a savings account.  Don’t get comfortable with the idea that you’re better off than people who don’t save at all – you are, but is it enough?  Let’s see.

So you’re in savings account that, in today’s market, probably pays you somewhere between 0.2% if you’re like most people and maybe 3%, if you’ve got a lot of assets and your mortgage there, too.  If you’re in the latter of those two groups and earning 3%, then we take 72 and divide it by 3, and we get….ouch, 24 years for your money to double.

If you’re in the former group and earning 0.2%, well, you’re looking at having your money still double all right, and in only 3,600 years!
Cool, huh?
If you have any personally driven questions or concerns please leave your name and email above or visit: http://www.whattoinvestinnow.com.

Technorati Tags: Compound interest calculator, Compound Interest Formula, Financial Ideas, how to invest in stock, How to Invest Stock, Invest Stock, Invest young, Learn Stock, learning Stocks, Microsoft, play the stock market, recovering economy, rule of 72, Stock investing, Stock Market, Stock Market advice, Stock Market Education, stock trading, the rule of 72, trade stock, What to Invest In, what to invest in now

Related posts:

1. Having A Smart Nest Egg!
2. What’s The Difference Between A Stock And A Bond?
3. Why Did The Stock Market Drop After Last Week’s Unemployment Report?
4. I’m Not Convinced, ­ “I Just Don’t Want To Play The Stock Market”
5. Don’t Be Apprehensive About The Market!