Definition: Everything you can't use money for once you have spent it.
Insight: Children that understand financial concepts early can become financially savvy and secure adults. One of the most important lessons is opportunity cost.
Definition: A mathematical computation that can be used to estimate how long it will take an amount of money to double at a certain interest rate, compounded annually.
Example: Number of years for investment to double: 8% interest annually takes approximately (72÷8) 9 years to double.
Example: Required rate of return: an investment to double in 10 years requires a rate of return of approximately (72÷10) 7.2%.
Example: Credit card debts: 10% interest - debt will double in 7.2 years. 19% interest - debt will double in 3.8 years.
Example: Inflation and purchasing power: 4% inflation will cause prices to double every (72÷4) 18 years.
Insight: To calculate how long for an investment to double, divide 72 by the interest rate. The result is the number of years it will take. The calculation assumes earnings are reinvested.
Insight: You can use the same logic to estimate the rate of return needed for an investment to double in a given number of years.
Insight: The same rules apply to debt, and inflation or purchasing power.
Principle: Use the Rule of 72 to focus on doubling wealth, not debts.
