Dark Comedy and the Rule of 72

You have a hypothetical balance of $8,000 on your credit card. I know. I know. There is nothing hypothetical about the balance on your credit card. And I wouldn’t blame you if you stopped reading after the first sentence.

But here’s the question: how long will it take that balance to double? How long will it take your balance to go to $16,000?

It’s not an easy question if you want an exact answer. But in the world of personal finance sometimes all you need is a down and dirty number to understand the problem you’re facing.

However there is an easy way to get an estimate. It’s called the Rule of 72.

Albert Einstein is credited with discovering the compound interest rule of 72. Referring to compound interest Albert Einstein said, “It is the greatest mathematical discovery of all time.” Who knew? Einstein was at least in the best position to judge mathematical discoveries.

If you look on your credit card statement and find the interest rate you’re being charged (if it’s more than 24% it is worse than dark comedy) and divide that number into 72. In this example 72 divided by 24 comes out a nice round three. So it takes roughly three years for your credit card balance to go from $8,000 to $16,000 and there’s nothing funny about that.

There is a more positive application. If you have $10,000 to invest and your friendly banker, who just happens to be the same person who got you into the credit card at 24%, says, “I will give you one and one-half percent interest per year if you give me your $10,000. Think twice. Bankers are not always generous.

This example sounds a lot like the Wimpy character from the Popeye cartoons who forever wants you to give him a hamburger.

So how long will it take your $10,000 to double at one and one-half percent interest? 72 divided by one and one-half comes out to a whopping 48! That’s right, it will take approximately 48 years to double $10,000 at one and one-half percent interest.

Now on the other hand someone else offers to give you 10% interest on your $10,000, and they are a lot more credible than Bernie Madoff, then in approximately seven years you will have $20,000. And that’s a lot better than owing $16,000.

Of course before I worry about the return on my money I worry about the return of my money. And if you’re watching the world around you that has become a serious question.